Pensions panacea

Pension Revolution
by Keith Ambachtsheer

ISBN 13/978-0-470-08723-7

Price: $80 (€60) hardcover

336 pages hardback

John Wiley & Sons

n his preface, Keith Ambachtsheer dedicates his third book to the idea that the adverse events of the first half of this decade have finally created the conditions to realise the pensions vision Peter Drucker first articulated 30 years ago in his book The Unseen Revolution: How Pension Fund Socialism Came to America (1976). In this book, Drucker posed the "legitimacy" question. A positive answer would only be possible if the "independently and expertly governed" condition became a general pension fund rule.

Together with the second book Pension Fund Excellence of 1996, Ambachts-heer's Pension Revolution tries to formulate the answer to the "legitimacy" question.

The book is organised around seven main themes. Each chapter has a standalone message and can be read on its own merit. While I enjoyed reading the book, some content is repeated and when one reads the book as a whole (rather than as individual chapters) this is annoying.

Ambachtsheer argues that the classic "medicine" for the sick pension systems is insufficient.

As defined benefit plans suffer from a fatal flaw (unclear definition of who bears the risk, game theory etc), and defined contribution plans have three serious flaws (inefficient investing, informational asymmetry and no solution for longevity risk), he introduces TOPS (The Optimal Pension Scheme) as the cure. It is interesting to read how the challenges as defined by Drucker in 1976 are still very actual.

Ambachtsheer points out that most of these challenges are not yet properly answered by the pension industry. Although there is hope, which he illustrates with the recent reforms in the Netherlands, Australia and Canada, these countries chose a revolution rather than evolution.

In part three, which deals with pension fund governance, the author explains that novelties of facts as well as novelties of theory require a paradigm shift. This is easier said then done mainly because of a lack of good governance: boards of directors should govern, not manage.

I especially enjoyed reading the chapter explaining why it is so difficult not to follow the "herd" and dare to implement a management style that differs from just a form of management against reputation and career damage. One per cent of additional return seems to be the minimum added value of good governance.

Part four on investment beliefs will surely make trustees feel uncomfortable.

Well documented, the author makes it clear that it is time to change our thinking about asset management. The table in chapter 21 is impressive evidence that just believing in "stocks for the long run and a constant equity risk premium of 3%" is too simple a basis for your strategic investment decisions.

It is also worth reading that the term LDI was first used by Marty Libowitz in 1987. So not much new under the sun here.

With an amazing simplicity and logic it is explained in part five that it is unaffordable to make DB plans risk free. It would require a 140% funded level (liabilities discounted at the risk free rate). The only alternative is to explicitly accept more risk on the part of all participants

Part six gives the reader more insights into benchmarks for administration costs. It shows that for a pension fund with less then 10,000 members it is more efficient to outsource benefits' administration. The data used for these and other calculations are for the majority based on the US and Canada and this should be taken into consideration by the European reader.

In the last part, the relationship between the pension fund and the asset management industry is examined. Ambachtsheer is convinced that pension funds will gradually move from the bottom to the top of the food chain of the financial services industry.

His main conclusion is that In today's circumstances, fully guaranteed, final earnings-based inflation-indexed pension promises have become too expensive for the guarantor and the search for more sustainable alternatives becomes the logical next step.

Karel Stroobants is CEO of Akkermans, Stroobants & Partners in Antwerp

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