Now we have reached the ripe old age of 15, IPE has achieved a fairly good perspective on things. Back in February 1997 when we published our first issue, e-mail was a novelty and hand-held computing devices were a twinkle in someone’s eye.
Funded pensions were on the rise as eastern European governments adopted capitalised state pension systems and some western European governments, like Ireland and Belgium, were to create sovereign pension funds - in the case of Ireland, using the proceeds of third-generation mobile phone licence proceeds.
Double-digit equity returns propagated an equity risk culture in the UK and elsewhere. In some cases, higher return expectations and commensurate discount rates encouraged higher equity investments through a self-fulfilling feedback loop.
High returns led to surpluses in countries like the Netherlands, Switzerland and the UK and the unclear ownership of these surpluses encouraged a culture of lower contributions as sponsors became unwilling to place defined benefit pensions on a sounder long-term footing in case they be taxed, as was the case in the UK.
How times change. The gears have duly shifted and pensions inhabit an unrecognisable world. The current backdrop of multi-year global de-leveraging, continued economic turbulence and ageing baby-boomers does not make for pleasant scenery. Pension funds are facing existential pressure in eastern Europe after only a few years of existence and most of Ireland’s reserve fund has been liquidated to bail out banks.
Regulatory short-termism, intentional or unintentional, through IFRS or national regulation, has increased, as has short-termism in markets, as the average holding period for stocks has dropped dramatically and institutional investors hold less sway in their home markets.
Financial innovation has increased the potential of asset class diversification while simultaneously heightening the burden both of complexity and of risk management. As we have seen, not all financial innovations have been to the benefit of investors or of the financial system more generally.
Structural changes, partly brought about through regulation of various sorts and partly through exogenous factors such as ageing, have led to an increasing and sophisticated use of risk management tools, including LDI, to manage liabilities and asset portfolios. The cost of longer-lived pensioner cohorts can be managed using longevity swaps.
As the investment and risk management toolkit has grown, asset managers and consultants have responded with solution-driven institutional services such as fiduciary management or implemented consulting. Indeed, the boundaries between asset managers, consultants and pension funds have in some cases blurred.
Some degree of regulatory arbitrage is now open to pension funds through the IORP Directive and the first pension funds are making use of the opportunity to domicile themselves in a more clement regulatory environment.
Pensions also have the opportunity, although arguably little external impetus, to manage themselves better. Dutch pension funds have a long track record at the forefront of this game, while some large British pension funds are not far behind in creating structures that better align the interests of the fund with members and away from service providers.
In short, there are many good examples for those seeking best practice in pension fund management. We will continue to highlight them.
And we mark our fifteenth anniversary with three thought-leading articles on pension funds and asset managers, and how they can better serve the pensioners of today and tomorrow.