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The Future of Pension Management:What Can Switzerland Learn From It?

Keith Ambachtsheer

Director Emeritus, International Centre for Pension Management

Rotman School of Management, University of Toronto

President, KPA Advisory Services

Thursday, June 15, 2017

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My Book’s Three Key Messages

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We know how to design sustainable 21st Century workplace pension plans.

We know how to build effective 21st Century pension organizations.

We know how to transform retirement savings into wealth-producing capital.

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Pillar 1: Universal, Pay-Go/Tax-Funded

• Sustainability

Pillar 2: Employment-Based, Pre-Funded

• Coverage, adequacy, affordability

• Fair, effective risk-pooling

• Choice architecture

• Innovation

Pillar 3: Individual-Based, Tax-Deferred

• Behavioral Economics

• Asymmetric information

• Low value, high cost?

Pension Design Challenges

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The Tinbergen DA/TB Pension Model

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Two Goals => Two Instruments

Affordability

Instrument

Safety

Instrument

Long-Horizon

Wealth-Creation

Investment

Program

Shorter-Horizon

Payments-for-Life

ALM

Program

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Swiss Pillar 2 Design

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High level of complexity

Strong emphasis on solvency and guarantees

How to simplify pension designs?

How to place greater emphasis on wealth creation rather than safety?

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Drucker’s Three Organization Effectiveness Drivers

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Clear purpose/ mission

Good governance

No resource constraints

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Research Findings

• Faulty board selection processes

• Micro management by boards

• Ineffective organization design/incentive structures

Remedies

• Upgrade board selection processes

• Upgrade board self-evaluation processes

• Upgrade board education processes

Pension Governance Challenges

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Observations from O’Barr, Conley and Keynes

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“The primary focus of pension organizations appears to be responsibility deflection and blame management….”.

O’Barr and Conley (1992)

Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally….”.

Keynes (1936)

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Five Additional Comments

• “The selection process for board members in our organization is seriously flawed….”

• “Our board can’t stay out of the weeds….getting involved with administrative and operational details….”

• “We have a wonderfully dedicated board….but they fly just above the tree tops rather than at a strategic fiduciary altitude….”

• “Our board does not use its time effectively….”

• “Our board has no appetite for dealing with our serious compensation issues….”

Governance Survey Findings

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Do these governance research findings

describe the current Swiss situation?

Governance of Swiss Pension Organizations

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Research Findings

• Investment beliefs/implementation gap

• Investment performance measurement/management gap

• Investment risk measurement/management gap

Remedies

• Align investment beliefs with implementation strategies

• Redefine ‘investment performance’ and how it should be measured

• Redefine ‘investment risk’ and how it should be measured

Pension Investing Challenges

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10-Year Net Excess Return Over The Liability Portfolio

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-3

-2

-1

0

1

2

3

4

5

6

0 2 4 6 8 10 12 14 16 18

Ass

et

min

us

liab

ility

ret

urn

(p

erc

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Asset-liability mismatch risk (percent)

Canadian

Dutch

United States

Source: CEM Benchmarking Inc.

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10-Year Net Excess Return Over The Asset Mix Policy Portfolio

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-3

-2

-1

0

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0 1 2 3 4 5 6 7

Net

val

ue

ad

de

d (

pe

rce

nt)

Volatility of net value added (percent)

Net Value Added vs. Standard Deviation of Value Added

Canadian

Dutch

United States

Source: CEM Benchmarking Inc.

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‘Value for Money’ Investment Services?

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Source: CEM Benchmarking Inc.

10-Year Net Value-Added versus Total Investment Costs - 2006-2015

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Keynes in 1936: Speculation or Investing?

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Speculation vs. Investing

Zero-sum trading

games less costs

lead to

LT market

underperformance

Creating and nurturing

sustainable long-term

cash-flows

lead to

LT market outperformance

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Real World Keynesian Investors

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Keynes, Buffett, Swensen, MFS, OTPP, CPPIB, Generation IM, Ownership Capital.....

Common characteristics: material LT market

outperformance with…..

Behavior that will seem eccentric, unconventional,

and rash in the eyes of average opinion.JMK, 1936

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My Book’s Three Key Messages

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We know how to design sustainable 21st Century workplace pension plans.

We know how to build effective 21st Century pension organizations.

We know how to transform retirement savings into wealth-producing capital.

1

2

3

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Three Questions for Switzerland

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Can you simplify your Pillar 2 designs and place greater emphasis on return-seeking?

Are you satisfied with the governance quality at Swiss pension organizations?

How can you create more scale and insourcing in your investment functions?

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