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Pension fund management needs “paradigm shift”

GLOBAL – Keith Ambachtsheer, the head of KPA Advisory Services, has called for a “paradigm shift” in pension fund management.

“We assert that a ‘new’ paradigm is required which includes a defensible set of investment beliefs,” said Ambachtsheer, who is co-founder of Cost Effectiveness Measurement and author of the widely-read Ambachtsheer Letter.

The comments come in a 29-page working paper published by the Pension Research Council of the Wharton School at the University of Pennsylvania.

“This paper asserts that the management of the assets of defined benefit plans has been guided by a simple three–part paradigm,” Ambachtsheer states.

He argues that plan designers had assumed that the generous equity risk premium observed in the past would be available in the future.

The second part of the old paradigm was that designers had “posited that a constant asset mix policy portfolio such as 60-40 or 70-30 (in stocks) will provide adequate protection against shorter-term equity markets volatility”.

“Third, given the first two assumptions, it can be deduced the bulk of a fund’s human and financial resources can be spent attempting to add modest additional return to the fund’s policy portfolio return by taking on a modest amount of additional risk.”

Ambachtsheer’s new paradigm includes a time-varying equity risk premium and an “integrative investment model” that directly links a varying return opportunity set to defined benefit balance sheet stakeholder income needs and risk tolerances.

And he also called for “a human systems-based decision-making protocol that can dynamically integrate the first two elements into the production of measurable stakeholder value over time”.

The new paper is entitled “Why pension fund management needs a paradigm shift”.

Ambachtsheer advises governments, industry associations, pension plan sponsors and money managers on pension governance, finance, and investment.

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