The academic world has not really been attracted to the pension fund world as a field of study. Most academic research, by a wide margin, usually goes into the workings of the capital markets rather than the workings of the pension fund participants in those markets.
One major exception to this is the Canadian academic and strategy adviser Keith Ambachtsheer, who has written three books on pension fund governance and was the co-founder of the CEM Benchmarking consulting firm, which monitors the organisational performance of about 300 big pension funds in various countries.
Ambachtsheer, director of the Rotman International Centre for Pension Management at the University of Toronto, addressed a conference in Hong Kong last week where he openly addressed many of the ills of the pensions industry and provided suggestions for what fund executives and directors could be doing going forward.
The conference, of the Pacific Pension Institute, attracted a record 185 attendees from 23 countries, including some of the largest pension and sovereign wealth funds in the world.
Ambachtsheer says there are five big issues which pension funds need to look at if they are going to aim for world’s best practice in investing as fiduciaries.
1. Alignment of interests. Funds need to minimise their agency issues with service providers, particularly fund managers, which means having appropriate benchmarks and incentivisation schemes in place. Agency costs can amount to 1-2 per cent a year, he says, which can equate to up to 50 per cent of the entire value of a retiree’s pension.
2. Good governance. Funds have to be well-run which needs skill at management level and an effective supervisory board. Also, the people involve need to ‘care’. The fund has to provide a balance of skill and being representative of the members, but this should not be a ‘dichotomy’, he says. Good governance could also add between 1-2 per cent a year to returns.
3. Sensible investment beliefs. Most importantly, the fiduciaries have to agree on an investment horizon for the fund and be open to various investment theories, some of which – such as the efficient market hypothesis – were not necessarily helpful. Ambachtsheer points out that pricing and risk change over time.
4. Scale matters. Ambachtsheer’s research indicates that ‘large’ funds tend to outperform ‘small’ funds by 30-40bps a year. This can be at least partly explained by the more widespread use of passive funds by large pension funds and their early adoption of private markets.
5. Competitive institutions need to pay competitively. “Funds that pay on the inside tend to spend a lot less on the outside,” he says. By this he means that building internal teams usually pays off through better performance, reduced external fees and an overall reduction in costs.
Ambachtsheer questions whether the pension fund industry as a whole has had the leadership required to address each of these issues.
“We know a lot about what we can do better,” he says. “It’s a leadership issue as to whether it gets done.”
He also believes funds can improve their communications with stakeholders so that their decisions are sustainable, fair and understandable.