In the iconic TV drama series “Route 66” as their Corvette crosses the central viaduct into Cleveland’s industrialized expanse, Tod Stiles makes an observation to partner Buz Murdock that could serve as an image for the current unsettled workplace pension landscape.
“The more we travel around, the farther away the horizon looks and the taller the buildings seem,” Tod says. “You think it would be the other way around.”
Plan sponsors, pension policymakers and participants must feel the horizon for retirement income security keeps getting farther away and the challenges taller to surmount, even with a legacy of knowledge and experience of more than 40 years since the start of the modern retirement financing era with the passage of ERISA and more than 60 years since the development of modern portfolio theory.
If anyone can put that horizon into focus and navigate retirement-income challenges to develop sustainable pension programs, Keith P. Ambachtsheer can.
Mr. Ambachtsheer — adjunct professor of finance, Rotman School of Management, University of Toronto; founder of KPA Advisory Services Ltd.; and co-founder CEM Benchmarking Inc. — provides a road map in his 254-page book, “The Future of Pensions Management: Integrating Design, Governance, and Investing,’’ newly published by John Wiley & Sons Inc., Hoboken, N.J.
Mr. Ambachtsheer brings to bear an intellectual vigor and insight from years of experience in putting theory in investing, governance and design into practical application. He is opinionated throughout the book on the way forward.
His book deserves attention for chapters such as “Norway vs. Yale or vs. Canada? A Comparison of Investment Models.” The chapter mostly compares the investment and organizational models of Norway’s Government Pension Fund Global and the Ontario Teachers’ Pension Plan.
“The Canada model derives its intellectual foundation from an investment framework set out by John Maynard Keynes and an organization design model set out by Peter Drucker,” Mr. Ambachtsheer writes, naming the renowned economist and legendary management consultant, two intellectuals who inspire Mr. Ambachtsheer’s analysis throughout his book.
“The Yale model starts in the same intellectual place, but its small scale hampers its implementation, and its dependency on David Swensen,Yale’s chief investment officer, hampers its replication,” Mr. Ambachtsheer writes. “In contrast, the Norway model derives its intellectual foundation from the modern asset pricing models initially set out in the 1960s/’70s by Markowitz, Sharpe, Lintner, Tobin, Fama, et al. On the organization design side, (the Norway model) is driven by ‘epistemic proceduralism’ (i.e., the need by the organization to demonstrate transparent procedures in order to establish legitimacy, despite the fact that the resulting oversight and decision-making structures may be suboptimal).”
So which model — Norway or OTPP — fares better? By far, it is OTPP both in investment and organizational models.
“Specifically, the respective reward/risk ratios indicate the Ontario Teachers produced almost seven times more additional wealth per unit of risk over the 1998-2014 period,” Mr. Ambachtsheer writes.
Mr. Ambachtsheer calls for the Norway fund to consider adopting the Canada model. By doing so, the Norway fund would add to “the wealth of current and future generations of Norwegians at a significantly higher potential rate than the current Norway model,” Mr. Ambachtsheer writes.
By the way, not mentioned in the book, the OTPP has a 107% funded level, according to the plan’s website.
Other chapters critically examine modern portfolio theory and other investment ideas. One chapter is titled, “Are Alpha and Betas Bunk?”
He finds fault in “an overreliance on simplistic investment theories,” especially the efficient market hypothesis, It could not explain the global financial crisis, he said. Fiduciaries “taking the assumptions and implications of EMH as reality is not defensible conduct today,” Mr. Ambachtsheer writes.
“The EMH cannot be invoked as a substitute for thinking about how investment markets really work, and for thinking about how the resulting investment beliefs should lead us to invest the financial wealth of other people.”
On value creation, Mr. Ambachtsheer criticizes pension fund investing in private markets “without being fully aware of the total fees and other costs.” He devotes two chapters to measuring value for money.
Mr. Ambachtsheer embraces an “evolving meaning of fiduciary duty” and calls for an expanded interpretation such as an obligation to be a good corporate citizen and consider all stakeholders in setting policy and decision-making.
One chapter calls for a fiduciary imperative to manage climate-change risks. On investors who treat climate-change risk as a known unknown, “to pretend it doesn’t exist” in its potential impact on future investment returns, has become “an increasingly untenable stance to maintain,” Mr. Ambachtsheer writes.
Because retirement pools of assets represent multigenerational financial interests, Mr. Ambachtsheer proposes the creation of a legal mechanism to protect future generations. As he asks rhetorically, “Are the interests of future stakeholders fairly represented in the decisions made today?”
Mr. Ambachtsheer calls for a transformation of capitalism. Institutional investors have become the dominant owners of the private-sector economy. Pension funds can “move capitalism in a direction that is more wealth-creating, more sustainable, less crisis-prone and more legitimate than the headwinds of capitalism today.” Why? Because pension funds “are the only global investor class which has a fiduciary duty to invest across generations.”
Such a transformation requires a redesign of pension systems so they themselves “become more sustainable and intergenerationally fair” and more effective stewards of the retirement savings of participants, he writes.
Mr. Ambachtsheer devotes four chapters to putting into practice long-termism, which he embraces as “the dominant investment paradigm.” Long-term investing processes produce better outcomes, Mr. Ambachtsheer writes. But the metrics of long-termism include more than fundamental financial factors. “Organizations can do well by doing good,” Mr. Ambachtsheer writes.
Long-horizon investors with wealth-creation mindsets can positively affect outcomes by effective engagement with boards and managements,” an interplay that “lies at the heart of sustainable capitalism,” Mr. Ambachtsheer writes.
Mr. Ambachtsheer emphasizes the key function of boards is spending their time on strategic decision-making and oversight. He is critical of boards that spend time interviewing, selecting and monitoring investment managers, or on other operational matters, better delegated to professional staff.
On pension plan design, Mr. Ambachtsheer says any model must address two broad goals of retirement systems: Plans must be affordable for participants and employers, and they must provide payment security for retirees.
To deliver those goals, participants need to pursue two types of investing approaches, Mr. Ambachtsheer says: a long-horizon wealth-creation capability “to support the affordability goals” and an asset liability-matching approach to support the payment security and pool longevity risk.
Pension plans need to reconcile the two opposing intergenerational goals for return and retirement-income safety. An important message he sends is a steady stream of retirement benefit payments can be done without “converting retirement savings into non-transparent, likely expensive, inflexible life annuities.”
Mr. Ambachtsheer calls for an acceleration of the transformation from traditional defined benefit plans and define contribution plans. As he notes, “the Dutch have publicly acknowledged the traditional DB plan is dead;” but that situation “does not mean moving to traditional defined contribution plans,” which need an overhaul to better tackle the accumulation and decumulation phases.
The holy-grail design has yet to emerge, although Mr. Ambachtsheer says with hope that “serious searches for middle ways between traditional DB and DC designs are underway, and I am betting ways will be found and implemented.”
In shaping his book, Mr. Ambachtsheer credits pioneering work of Roger Martin — former dean of the Rotman School and current institute director of its Martin Prosperity Institute — in integrative thinking and creative resolution of opposable ideas to contribute to the integration of design, governance and investing elements.
Drawing on his knowledge and experience, he gives pension plan stakeholders reason for confidence in the long horizon of financing pension income, putting it into better focus. In fact, even in “Route 66” Tod Stiles’ partner embraces the unknown far ahead. As Buz Murdock responds, “The more we travel around, the bigger we get,” growing in ability to deal with the challenges in the distance.
