One solution for pension funds to generate higher returns in a low-yield environment would be to introduce good governance, according to Keith Ambachtsheer, president and founder of KPA Advisory.
Speaking at the IPE Conference in Barcelona, Ambachtsheer presented research showing that, over a 10-year period, pension funds with better governance outperformed their benchmarks by 2 percentage points.
“Implementing a sensible philosophy over a longer period of time makes a big change,” he said.
Ambachtsheer cited the Ontario Teachers Pension Plan, which, over the last 20 years, has outperformed its benchmark annually by 2.2 percentage points on average.
Claude Lamoureux, former chief executive at the pension plan, said one major positive impact was building in-house expertise for asset classes such as infrastructure or private equity.
He said he was often “surprised” to see trustees and governments paying a lot of money for external managers instead of using the money to pay a competitive salary for an in-house expert.
Lamoureux said it was easier to make changes to portfolio structure with in-house expertise rather than replacing external managers.
Ambachtsheer said the 2-percentage-point performance differential between externally and internally managed private equity investments was down to costs.
“It is only a question,” he said, “of whether you pay it to an asset manager or put it into your profit and loss calculations.”
Ambachtsheer said it made sense to run a pension fund like a company with a “philosophy” and “someone in charge”, adding that a scheme could also be seen as a “social enterprise without a bottom line”.
He said pension funds should keep in mind that “you need as many instruments as you have goals” and proposed separating the return-seeking pool from the pension payout side, as “you cannot serve both from a single entity, just as you cannot suck and blow at the same time”.
ABN Amro’s pension fund in the Netherlands decided to run the scheme like a company after legislative changes in the country last year openned up the possibility of restructuring governance.
Geraldine Leegwater, chief executive at ABN Amro Pensioenfonds, said the scheme’s new approach had reduced the time spent in board meetings with the full board, as 90% of the agenda is usually about the running of a “complex financial institution”.
Now an executive board is running this day-to-day business, while non-executive board members – the representatives of employer and employees – are included in discussions on strategy and long-term outlook.