It seems like Steven Covey’s personal improvement bible “The 7 habits of highly effective people” has been on best-selling book lists forever. What if we changed the ‘people’ word in the book title to ‘pension funds’? What would become of Covey’s effective people habits like ‘be proactive’, ‘begin with the end in mind’, ’think win-win’? We demonstrate in this column that while the habits of highly effective pension funds differ from those of highly effective people, seven remains the right number:
1. Develop effective governance practices: good board governance creates the context for the pension fund organisation. It clarifies mission, aligns stakeholder interests, creates boundaries, consciously delegates to management what the board cannot do itself, and monitors results against benchmarks that are both relevant and reasonable. Thus it must posses the composite skill and experience set to perform these tasks well. Finally, good board governance monitors its own performance and ensures strong continuity over time.
2. Develop effective strategic planning and review practices: organisations do not stay static for long. They either progress or regress. Steady progress does not just happen. It is the result of a conscious effort to define the pension fund organisation’s strategic issues, to assess realistically the fund’s current positioning with respect to these issues, where it wants to be positioned five years from now, and how it is going to get there. While it is management’s job to develop the plan, it is the board’s job to assess, and if necessary, critique it. While it is management’s job to implement the approved plan, it is the board’s job to carefully monitor progress towards agreed-on goals. A good strategic planning discipline ensures that the board maintains a strategic focus, and does not descend into micro-management.
3. Build a well-designed organisation: research shows that in general, good organisation design is statistically related to strong financial performance, high customer satisfaction, and high workforce morale. Research also shows that good organisation design is at least as much science as it is art. Capabilities and responsibilities must be aligned. Accountabilities and delegation must be clear. Organisational layering must neither show gaps nor be compressed. Functional accountabilities must clearly align with the mission of the organisation. Pension funds ignore these findings at their peril.
4. Use an integrative investment model: for every asset yin there is a liability yang. Thus pension fund reward and risk should always be assessed, and dynamically managed in a liability-relative context. This must be so both prospectively and from retrospective measurement perspective. After all, what gets measured gets compensated, and what gets compensated gets managed. So we better measure and compensate the right things. This habit No 4 may seem a flash of the blindingly obvious. Yet it is seldom practiced in the global pension fund community even today. Why? Because most funds still have ambivalent attitudes towards habits Nos 1, 2, and 3.
5. Develop effective partner/supplier strategies: it is not realistic to expect a pension fund to perform all necessary functions inside the organisation. Some functions must necessarily be outsourced, while others may simply be better performed by external providers. The caveat is that external partner/supplier relationships must be carefully managed with a ‘win-win’ mindset. Just as economic interests must be aligned inside the pension fund organisation, so must they be with external providers. For external suppliers of investment services, this means ensuring they have an appropriate amount of their own ‘skin in the game’.
6. Be aware of scale economies: both the investment and the benefit administration operations of pension plans are subject to material economies of scale. Large plans must consciously use size to their advantage. Low unit costs mean more money to pay pensions. Large scale also means more clout in negotiations with external service providers. In the other hand, small plans should be aware that they are economically disadvantaged. Their boards should have the courage and wisdom to assess a pension fund’s economic viability, and to take drastic measures (eg, merge the fund with a larger one) if needed.
7. Foster strong stakeholder relations: while a pension fund is usually the exclusive provider of investment and administration services to a well-defined ‘market’, it would be a fatal error for it to act as an invincible monopoly. Customer satisfaction is in fact critical to the long term survival of any pension fund. This makes stakeholder relations an important strategic positioning element in any five-year strategic plan. Key stakeholder groups must see the pension fund as an excellent provider of investment and administration services at reasonable risk and cost.
We have had the good fortune of working with pension funds that are developing and practicing these seven habits. They are energising, exciting places to be. Old assumptions are questioned. New ideas are examined. Boards are invigorated and become more strategic in their thinking and actions. Managements’ attention and work galvanises around a handful of strategic goals. Organisation design is given the attention it deserves. Investment decisions are made dynamically in an integrated balance sheet framework. Outside provider relationships are redefined and renegotiated. Only important things are measured. In short: wow!!!
Make no mistake about it. Choosing the ‘seven habits’ path is hard work. But it really does produce highly effective pension fund organisations.
Do your fund’s habits measure up?
Keith Ambachtsheer is president of KPA Advisory Services, a strategic advisor to ‘best practices’ pension funds around the world. He is also co-founder of Cost Effectiveness Measurement Inc. Both firms are based in Toronto, Canada. His email address is keith@kpa-advisory.com.

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