There is too much trend following and too little intellectual irritation in pension management, according to Keith Ambachtsheer, principal of KPA Advisory Services.
Discoveries based on numerical studies dominate thinking in pension management and finance more generally, while the arguably more conclusive deductive reasoning is left wanting, argues Keith Ambachtsheer.
Principal of KPA Advisory Services, director at the Toronto-based Rotman International Centre for Pension Management and provocateur, Ambachtsheer says that really powerful solutions usually originate from first-principle deductive reasoning, rather than from numerical studies.
Deductive reasoning is a top-down way of thinking, with reasoning moving from a more general theory to the more specific. (Inductive reasoning is the opposite).
Woody Brock does in his latest book American Gridlock: Commonsense Solutions to the Economic Crises reminds Ambachtsheer of the tendency to quickly jump on any numbers-based study that appears to solve an important problem.
“The history of science makes it clear that most important problems have been solved by deductive logic. Information [only] re-enters the picture in the final stage of scientific discovery process known as ‘confirmation’…” writes Brock in his book.
Ambachtsheer says that retracing his personal deductive ‘discovery’ journey in the field of pension design and management over four decades confirms this truth.
He summarises four discovery statements as follows:
- For a pension plan to be sustainable, it has to be both transparent and inter-generationally fair
- For a pension plan to be sustainable, it has to be both affordable to younger participants and offer security to the older on
- Excellence in pension management requires mission clarity and autonomy of action, good governance, sensible investment beliefs, scale and the right people
- Risk premiums in financial markets vary, depending on the collective mindset of market participants.
“Deductive logic tells us that pension design and management structures built on these foundations will be both sustainable and measurably effective. We should not be surprised that a growing body of well-crafted empirical studies is now confirming these four principles,” explains Ambachtsheer.
“Woody Brock is an iconoclast,” he says. “He keeps reminding us that the all the good thinking has come out of deductive reasoning, first principles; it is such a powerful idea.”
“In pensions, historically the cost/benefit of going with the flow is really strong,” he says. “For example, if you come out and say defined benefit plans suck then you don’t have a really long career. It is difficult to be outside the box and get anyone to take you seriously.”
Part of the problem, in creating critical thinking in this industry, he says, relates to its evolution.
“The pension industry is a combination of a layperson’s approach with a trust-law overlay. In addition, because laypeople are legally bound to seek help, there is an overabundance of ‘help’ from service providers. So for players in the industry there is a sense is to defend it.”
This is destructive, Ambachtsheer says, because critical thinking can be the difference between success and failure.
“The pension design and management field has suffered from too much conventional thinking for too long. Too many people have been too intellectually lazy to examine their conventional beliefs using first-principle deductive logic.”