The Future of Pension Management

The Future of Pension Management offers a progress report from the field, using actual case studies from around the world. In the mid-70s, Peter Drucker predicted that demographic dynamics would eventually turn pensions into a major societal issue; in 2007, author Keith Ambachsheer's book Pension Revolution laid out the ways in which Drucker's predictions had come to pass. This book provides a fresh look at the situation on the ground, and details the encouraging changes that have taken place in pension management concepts and practices. The challenges identified in 2007 are being addressed, and this report shows how design, management, and investment innovation have led to measurably better pension outcomes.

Pensions have become an everyday news item, and people are rightly concerned about the security of their retirement in light of recent pension scandals and the global financial crisis. This book provides a note of encouragement, detailing the ways in which today's pensions are becoming more and more secure, and the new ideas and practices that are chipping away at the challenges.

• Learn how pension management practices are improving
• Examine the uptick in positive outcomes over recent years
• Discover why pension investing is turning toward the long-term
• Consider the challenges that remain and their possible solutions

Drucker's vision of a needed pension revolution is unfolding in real time. Better pension designs, more effective pension governance, and more productive pension investing are mitigating many of the issues that threatened collapse. The Future of Pension Management provides a real-world update on the state of pensions today and a look forward to the changes we still need to make.

Preface xi

Part One Touchstones

Chapter 1 Improved Pension Designs and Organizations: Gateways to a More Functional Capitalism 3

Chapter 2 Pension Plans for the Masses: Good Idea or Pipe Dream? 11

Chapter 3 Does Institutional Investing Have a Future? 17

Chapter 4 Thomas Piketty’s Capital in the 21st Century: Its Relevance to Pension Fund Management 25

Part Two Pension Design

Chapter 5 Why We Need to Change the Conversation about Pension Reform 33

Chapter 6 On the Costing and Funding of Defined-Benefit Pensions: Separating Fact and Fiction 41

Chapter 7 Defining Defined-Ambition Pension Plans: Conclusions from an International Conversation 49

Chapter 8 What Are Target-Benefit Plans and Why Should You Care? 55

Chapter 9 Designing 21st-Century Pension Plans: We’re Making Progress! 61

Part Three Pension Governance

Chapter 10 How Effective Is Pension Fund Governance Today?: Findings from a New Survey 69

Chapter 11 The Evolving Meaning of Fiduciary Duty: Is Your Board of Trustees Keeping Up? 81

Chapter 12 Pension Organizations and Integrated Reporting: Improving Stakeholder Communications 87

Chapter 13 Measuring Value-for-Money in Pension Organizations: A New Look 93

Chapter 14 Measuring Value for Money in Private Markets Investing: Why Investors Need a Standard Protocol 101

Chapter 15 How Pension Funds Pay Their Own Investment People 107

Chapter 16 Investment Beliefs and Organization Design: Are They Aligned in Your Organization? 127

Chapter 17 Norway versus Yale—or versus Canada?: A Comparison of Investment Models 133

Chapter 18 Does Culture Matter in Pension Organizations? 141

Part Four Pension Investing

Chapter 19 Are Investment Returns Predictable? 151

Chapter 20 Investment Returns in the 21st Century 157

Chapter 21 Long-Termism as the Dominant Investment Paradigm 163

Chapter 22 Investing for the Long Term I: From Saying to Doing 169

Chapter 23 Investing for the Long Term II: How Should We Measure Performance? 177

Chapter 24 Investing for the Long Term III: Does It Produce Better Outcomes? 183

Chapter 25 Are Alphas and Betas Bunk? 189

Chapter 26 Risk Management Revisited 195

Chapter 27 From an Unknown to a Known: Managing Climate Change Risk 201

Conclusion 207

Notes 209

About the Author 219

Index 221

"Ambachtsheer's precise and clear discussion of the issues is a valuable contribution to furthering their message and, by extension, the interests of long-term savers." (Investments & Pensions Europe, April 2016)

KEITH P. AMBACHTSHEER is Director Emeritus of the International Centre for Pension Management at the Rotman School of Management, University of Toronto, and President of KPA Advisory Services, which provides strategic advice to a global clientele of pension and investment organizations. He is the author of three bestselling books and has been a regular contributor to industry journals since the 1970s.

Pension funds have become an everyday news item, and much of the news isn’t good. From the ongoing threat of future financial crises and bubbles to downright criminal scandals, workers are justifiably anxious about the security of their retirement. Fortunately, pension management is changing for the better, and The Future of Pension Management provides a much-needed, authoritative update on the state of the pension revolution predicted by Peter Drucker back in the mid-1970s.

In this new treatise by the bestselling author who has been called the world’s #1 knowledge broker in institutional investing—pension professionals, institutional investors, consultants, regulators, and legislators all get a full progress report on how pension management has changed since the financial crash of 2008—specifically how innovations in design, governance, and investing are leading to measurably better pension outcomes. Clear industry examples provide a broad perspective on how pensions are managed in a variety of countries, who is having the most success, and where the lessons learned are taking the industry. Remarkable results are being found by shifting away from short-term investment strategies to longer-term disciplines aimed at wealth creation, and as you’ll see inside, these new ideas and practices, among others, are chipping away at the challenges that still remain. Highly visual features such as charts, diagrams, and bulleted talking points enhance:

• An in-depth study into how the Netherlands and Australia are transforming traditional defined benefit and defined contribution formulas into “defined ambition” and “target benefit” hybrids
• Insightful examinations of how government initiatives are expanding pension coverage in some countries, including in the United Kingdom with its National Employment Savings Trust (NEST)
• Up-to-date evidence showing how improving governance in the global pensions sector is abandoning “short-termism” in favor of transforming retirement savings into wealth-producing capital
• Studies supporting long-horizon active management that produces higher long-term returns than either passive or short-horizon active management

The Future of Pension Management brings you up to speed and aligns you with where and how success is blossoming in the global pensions industry.