Interview: Keith Ambachtsheer
Liam Kennedy in conversation with Keith Ambachtsheer
IPE: What’s your general advice to pension funds that struggle to achieve diversity on their boards?
KA: The view I have come to over time is to think hard about not creating either-or situations where that leads towards fights about the numbers of certain groups. All this is largely time not well spent. Of course diversity is an important dimension. There is good research that says it opens up discussions and issues and questions that otherwise would not be raised. But it’s not enough by itself. There’s this notion of what you might call representativeness, Peter Drucker called it legitimacy, the notion that this group of people really cares about the stakeholders involved in bearing risk. It gets you back to the important element: we don’t have enough strategic thinking at the board level; instead, we have too much micro management. Fundamentally do you have a board that can think beyond tomorrow? That really speaks to the selection process and thinking through how you create selection processes to ensure you get the board you want.
IPE: How does size interplay with organisational culture?
KA: If the pension organisation has great culture but does not have scale, it will recognise it has a serious problem and that it can’t really serve its constituency. It will go on to figure out ‘plan B’. In the UK, the local authorities merger process is an example. But the notion of traditional competition is questionable. There is an idea that if you have 10 relatively small pools competing you somehow get a better outcome through competition but I don’t believe that. The whole pool will underperform. Some characteristics seem to generate more success than others. Guess what? Scale is one of the characteristics. The biggest driver, is that scale allows you to internalise high-cost investing: real estate, infrastructure, private debt. If you can internalise that with scale you can save a ton of money.
IPE: Inevitably you can’t have everyone running a large-scale private market operation.
KA: I think where it gets you is that, if you are stuck with a non-scalable type of operation because you’re too small, you come back to one of the basic rules in game theory, which is don’t play games you can’t win. So you become a free rider at 5bps. A lot of advisers don’t like that outcome because it puts them out of business. So it’s in their interest to create something that’s more complex, more expensive, and to hope that it creates more value than it costs.
IPE: How much do you think pension funds should pay their people?
KA: Generally, if you want an entrepreneurial-type organisation, then it goes back to the Canadian model. You’re dealing with people you want to be entrepreneurs and you want them to go out and take calculated risk. So you want a compensation scheme that matches that philosophy. Mark Matchin, who took over from Mark Wiseman [at Canada Pension Plan Investment Board], ran Goldman Sachs Asia for 15 years. I’m sure he wasn’t on 100% base pay. If you want to attract people like that to work at your organisation you can’t get them to work on 100% base. It’s very much part of the organisational culture how you compensate people, both on the level and the formula.
IPE: How do you deal with the issue of peer-group benchmarking when you have a limited number of institutions, as in Canada, all comparing their pay levels?
KA: Once you get into that space, what’s an appropriate number and how does the board decide? Well, you could certainly see them wanting to have some kind of objective measure to justify whatever decision they are making. But if that turns into some kind of internal loop, with one consultant going around and comparing the same 10 organisations, then you can’t be totally comfortable with that either.
IPE: Is there a satisfaction premium for working in a pension institution?
KA: You need a coherent cultural story that you have to tell about your organisation and part of that story needs to be that you can attract the kind of people you think you need in your organisation. That will continue to vary from place to place. APG runs some of its really high-cost operations out of New York, which is one way of having a little bit of both. One of the questions that variable compensation raises, which is partly qualitative and partly quantitative, is based on performance. In private markets it raises a challenge. What is the true performance? If it largely involves values constructed according to a formula other than market based ones, it raises the trust question as to how transparent and fair the system is. You have outside critics looking very carefully at what is happening.
Keith Ambachtsheer’s latest book, The Future of Pension Management, was published earlier this year