Book review: Ambachtsheer's 'The Future of Pension Management'
IPE editor Liam Kennedy reviews Keith Ambachtsheer’s latest book on the pensions industry, which was launched in London on 15 April with a panel discussion featuring former National Employment Savings Trust chair Lawrence Churchill, USS Investment Management chair Virginia Holmes and Railpen Investments chief executive Chris Hitchen
The Future of Pension Management: Integrating Design, Governance and Investing, by Keith Ambachtsheer (Wiley, 2016)
Where others might lose themselves in a discussion on organisational design, regulation or social policy, Keith Ambachtsheer’s fourth book, The Future of Pension Management, wastes no time in placing pension funds at the heart of capitalism. As he contends, they are the stewards of more than $30trn (€26.3trn) in assets and the only institutional financial actors with a true multi-generational investment mission.
Readers of the global financial press are becoming increasingly familiar with the names of Canadian pension institutions thanks to their investments in infrastructure and other assets. These names have not entered this league by accident, having developed world in-house expertise in private markets since the early 1990s, a process Ambachtsheer was closely involved with.
Notably at that time, pension funds in other countries were keenly embracing the doctrine of outsourcing, largely at the behest of actuarial advisers who were interested in building up investment consulting practices and, of course, the asset managers themselves.
Attracting investment talent to work in Toronto takes Wall Street-style remuneration, and the stakeholders at Canadian pension funds have accepted this as the price for better long-term outcomes (Ambachtsheer argues that long-term owners like Ontario Teachers or the Canada Pension Plan Investment Board are also good for both capitalism and wider society).
Many readers will turn to the chapter that centres on what pension funds pay their own staff. Using data from a survey of 37 international pension funds carried out by Ambachtsheer’s advisory firm, it will come as no surprise that there is a “Canada effect” – namely, that pay is higher at Canadian pension funds than at their international peers. Overall, pension fund pay is higher than average but lower than at other financial institutions.
Clearly, the Canadian pension plans have scale and first-mover advantage in private markets expertise, and expertise that will not be easily replicated elsewhere. So it is likely that their pay levels will stay ahead of their peers. But, given the contentious issue of investment costs in Europe and the move of some large Dutch pension providers away from bonus remuneration for their own executives, the debate about the appropriate level of internal and external costs will continue.
As Ambachtsheer posits, big internal pay packages look like a breach of fiduciary duty, yet scrapping them and incurring potentially higher costs by outsourcing investment could actually be a real (and worse) breach.
This book is required reading for all involved with pensions, adding real value to the debate on areas like organisational design and structure. Many large pension funds have gained lean muscle in recent years, are more agile as financial institutions and arguably are more able to get a better deal from the providers that serve them. One of Ambachtsheer’s contributions in this area was the establishment of the Rotman International Centre for Pension Management Board Effectiveness Program in 2011.
The chapters on investment show there is much work to be done in understanding the true nature of long-term investing, and most pension fund CIOs and CEOs would admit that truly acting for the long term is easy to embrace but hard to achieve in practice.
Pension funds deserve to be better understood as a group of financial institutions, so this book deserves a wider audience than pension professionals, especially given its valuable contributions on the long-term policy benefits of workplace pension savings and how to achieve reforms; one of the book’s opening chapters addresses the opening up of “pension funds for the masses”.
Indeed, Ambachtsheer’s target audience is growing: consider Chinese enterprise annuity funds, micro pensions in emerging economies or new forms of pension saving through robo-advisers. All these developments are breeding the long-term savings pools of the future. If Ambachtsheer can help these (future) actors to avoid the policy, regulatory and organisational own-goals that certain Western countries have made, then all for the better.
Pension funds play a vital economic role, but, with relatively lean organisational structures, they also have a much lower collective budget to lobby for their own interests when measured against the resources of banks or insurers. 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.