Description
Book SynopsisPraise for Pension Revolution
When Keith Ambachtsheer puts his keen mind to work on a problem, watch out! Here he exposes today''s fragile arrangements for the most serious social dilemma of our times--financing retirement. Then he provides a compelling and powerful set of solutions. His writings are essential reading for all who care about the future of American living standards.
--Peter Bernstein, founder and President, Peter L. Bernstein, Inc., and author of Capital Ideas and Against the Gods
This book describes one of the most ingenious inventions in the history of mankind: pension funds offering credible promises about old-age income. It reads like a thriller: how can well-governed pension funds be created in an imperfect world in which mortals wrestle with foibles and moral shortcomings? One of the world''s leading experts on pensions searches for the answer--and finds it.
--Lans Bovenberg, Scientific Director, Network for Studies on Pensions
Trade Review“I enjoyed reading the book…Well documented, the author makes it clear that it is time to change our thinking about asset management.” (
Investment & Pensions Europe, April 2007)
“This book is a valuable tool in raising awareness of the current climate and provides people with the information they need to create efficient pension solutions in the future." (Pensions World, May 2007)
Table of ContentsPreface: Peter Drucker’s Pension Revolution: Here at Last xxiii
Introduction: Why a Pension Revolution Now? xxvii
The Trouble with DB Plans xxvii
DC Plans Are Not the Answer Either xxviii
Expert Pension Co-ops xxix
TOPS Tipping Points xxx
PART ONE The Pension Revolution: Touchstones
CHAPTER 1 Are Pension Funds ‘‘Irrelevant’’? 3
An ‘‘Unreasonable’’ Actuary? 3
Exley’s Four Irrelevance Propositions 4
So What Is Relevant? 4
Responding to Exley 6
Relevant Pension Funds: Building the Case 6
Managing Retirement Income Risks 7
Leveling the Informational Playing Field 7
Getting the Execution of the Idea Right 8
CHAPTER 2 The Pension Revolution—Are You a Believer Yet? 9
A Revolutionary Reordering of the Pensions Firmament 10
From Fuzzy Pension Deals to ‘‘Risk-Sharing Co-ops’’ 10
Toward Pension ‘‘Business Models’’ That Work: The Risk Issue 11
Toward Pension ‘‘Business Models’’ That Work: The Scale Issue 12
The Pension Governance Issue 13
COPYRIGHTED MATERIAL
Two Role Models 14
PGGM 14
SunSuper 15
Great Treasures? 15
CHAPTER 3 After the Perfect Pension Storm: What Now? 16
From Vegas to Oxford: In Search of Answers 16
Do Nothing or Something? 17
The Corporate Context: Two Basic Choices 18
New DC Plan ‘‘Business Model’’ Also Needed 19
The Industry/Public-Sector Pension Context 19
The ‘‘Fair Value’’ Question 20
Better Public Pensions Policy 21
CHAPTER 4 Beyond Portfolio Theory: The Next Frontier 22
Investment Theory’s Next Frontier: The Academic View 22
Investment Theory’s Next Frontier: Two Further Considerations 24
The Next Frontier: ‘‘Integrative Investment Theory’’ 25
CHAPTER 5 The United Airlines Case: Tipping Point for U.S. Pension System? 29
The United Airlines Case 29
A Good Question and Two Very Different Answers 30
ERISA’s ‘‘Sole Interest’’ Rule 31
Lessons from Abroad 32
Searching for ‘‘Supreme’’ Answers 33
The UAL Case in Context 34
CHAPTER 6 Peter Drucker’s Pension Revolution After 30 Years:
Not Over Yet 36
Two Unfashionable Themes 36
Politico-Agency Issues 37
Pension Contract and Risk Issues 39
Investment Beliefs 40
Pension Fund Governance 40
Still Much Work to Do 41
CHAPTER 7 Winning the Pension Revolution: Why the Dutch Are Leading the Way 42
The Globe’s Number One Pensions Country 42
Culture, Compactness, and Leadership 44
Regulatory Leadership 45
Research Leadership 46
A Remaining Challenge: Solving the Organization Design Puzzle 46
What About the Other Pensions Countries? 47
CHAPTER 8 Pension Reform: Evolution or Revolution? 48
A Pension ‘‘Tipping Point’’ Indeed 48
What Should Happen? 49
Pension Reform in the United States 50
Pension Reform Elsewhere 51
Pension Reform: Evolution or Revolution? 52
PART TWO Building Better Pension Plans
CHAPTER 9 Can Game Theory Help Build Better Pension Plans? 57
Pension Games 57
Why do Pension Game Switches Occur? 58
Who Are the Stakeholders and What do They Want? 59
Sources of Risk in Pension Schemes 60
Mitigating Micro Risks 60
Can We Mitigate Macro Risks? 61
Is Investment Risk Worth Taking in DB Plans? 61
Can Game Theory Build Better Pension Plans? 62
CHAPTER 10 If DB and DC Plans Are Not the Answers, What Are the Questions? 63
From Answers to Questions 63
Ultimate Pension Questions and Their Consequences 64
Underwriting Pension Mismatch Risk: Any Volunteers? 64
Should Pension Mismatch Risk Be Minimized? 66
Pension-Delivery Institutions 67
Benchmarking Traditional DB and DC Plans 67
The Way Ahead 68
CHAPTER 11 Human Foibles and Agency Dysfunction: Building Pension Plans for the Real World 69
Some Fundamental Questions First 69
Back to First Principles 70
Human Foibles 71
Agency Issues 72
Counteracting Human Foibles 73
Minimizing Agency Costs 74
TOPS, Employers, and Public Policy 75
TOPS and DB Plans 77
CHAPTER 12 DB Plans and Bad Science 78
Science and the Design of Pension Contracts 78
The TOPS Contract 78
Taking on Investment Risk: Implications 79
Is Investment Regime Risk Insurable? 80
Intergenerational Bargaining 81
Robust Course-Correction Mechanisms Required 82
The Flawed DB Model 82
Bad Science 83
CHAPTER 13 Peter Drucker’s Pension Legacy: A Vision of What Could Be 84
Two Handshakes to Remember 84
The Melbourne Message 85
TOPS: Neither DC nor DB 86
TOPS and Investing 87
TOPS and Governance 87
TOPS and the Real World 88
The Drucker Visit 89
PART THREE Pension Fund Governance
CHAPTER 14 Reinventing Pension Fund Management: Easier Said than Done 93
A Paradigm Shift? 93
Novelties of Fact 94
Novelties of Theory 94
Pension Industry Responses 96
Crossing the ‘‘Innovation Chasm’’ 97
CHAPTER 15 Should (Could) You Manage Your Fund Like Harvard or Ontario Teachers’? 99
Four Things in Common 99
Legal Foundations: Solid or Not? 100
Governance and Management: Understanding the
Difference 101
Investment Beliefs: Theirs or Yours? 102
Investment Processes: Like Wall Street? 103
Should You Manage Like HMC or OTPP? 104
Could You Manage Like HMC or OTPP? 104
CHAPTER 16 ‘‘Beauty Contest’’ Investing: Not Dead Yet 106
‘‘D´ej `a Vu All Over Again’’ 106
Why ‘‘Beauty Contest Investing’’ Is Ugly 108
Integrative Investment Theory 108
Investment Beliefs 109
Managing from the Inside Out 110
CHAPTER 17 Eradicating ‘‘Beauty Contest’’ Investing: What It Will Take 112
The Ugliness of ‘‘Beauty Contest’’ Investing 112
A Two-Pronged Eradication Strategy 113
What Corporations Must Do 114
What Investing Institutions Must Do 114
A Debilitating Pension Fund Governance Problem 115
Light at the End of the ‘‘Beauty Contest’’ Tunnel? 117
CHAPTER 18 High-Performance Cultures: Impossible Dream for Pension Funds? 118
Thinking and Acting Like Goldman Sachs 118
New Research Results 119
Specific Governance and Management Challenges 121
In Conclusion 122
CHAPTER 19 How Much Is Good Governance Worth? 124
Governance Quality and Organization Performance Should
Be Related 124
A Road Map for the Journey of Discovery 125
The Pension CEO Score and NVA Metrics: The Data 126
Pension CEO Scores Meet NVA Metrics 127
Further Insights 128
The Value of Good Governance 129
PART FOUR Investment Beliefs
CHAPTER 20 The 10 Percent Equity Return Illusion: Possible Consequences 133
Consequential Miscalculations 133
Why 10 Percent Doesn’t Work 134
Painted into an Awkward Corner? 136
Consequences 137
CHAPTER 21 Stocks for the Long Run? . . . or Not? 139
A Debate with Jeremy Siegel 139
How Investment Theory Became Investment Practice 140
What Is Wrong with These ‘‘Proofs’’ 141
What if ‘‘Reality’’ Is Not a Random Walk? 141
Investment Regimes, Dividend Yields, and ERPs 143
The Post-Bubble Blues Decade 143
CHAPTER 22 ‘‘Persistent Investment Regimes’’ or ‘‘Random Walk’’? Even Shakespeare Knew the Answer 145
The Ambachtsheer-Siegel Debate Revisited 145
History on Our Side 146
The Investment Returns Story: How to Tell It 147
The ‘‘Investment Regime’’ Game: Spot Today’s Well Before
It’s Over, and Tomorrow’s Before It’s Gone on Too Long 148
‘‘Regime Spotting’’ versus ‘‘Random Walk’’: Which Is More
Useful? 149
Contents xv
Theory on Our Side, Too 150
Fellow Travelers 150
CHAPTER 23 The Fuss about Policy Portfolios: Adrift in Institutional Wonderland 151
Tempest in a Teapot . . . or Not? 151
Duality in Finance: A Brief History 152
Financial Duality in Pension and Endowment Funds:
Building the Conceptual Framework 153
New Insights from the CEM Database 154
Enter Organizational Dysfunction 155
Decisions by Default 156
CHAPTER 24 Shifting the Investment Paradigm: A Progress Report 157
The ‘‘Policy Portfolio’’ Debate Continues 157
A Lens to See the World 158
Why the ‘‘Old’’ Lens Distorts 158
A Varying Equity Risk Premium 159
A New Lens 160
A Higher Level of Thinking 161
Glimmers of Light 163
CHAPTER 25 Whose ‘‘Investment Beliefs’’ Do You Believe? 164
Writing an ‘‘Investment Beliefs’’ Statement 164
Inferring Beliefs from Actions 165
Measuring Predictive Ability 166
What about Market Timing and Strategic Asset Allocation? 167
Expected ERP Powerful Predictor 167
Enter Woody Brock 168
In Conclusion 169
CHAPTER 26 Our 60-40 Asset Mix Policy Advice in 1987: Wise or Foolish? 171
Why Roll the Clock Back 20 Years? 171
Leibowitz’s Immunization Campaign 172
Investment Beliefs in 1987 173
Investment Beliefs in 1997 173
The Right Kind of Active Management 174
Wise or Foolish? 175
CHAPTER 27 ‘‘But What Does the Turtle Rest On?’’ A Further Exploration of Investment Beliefs 177
‘‘But What Does the Turtle Rest On?’’ 177
The Efficient Markets Hypothesis: Fact or Fiction? 178
The Three Strikes against the EMH 179
Economists and ‘‘Operationally Meaningful Theorems’’ 180
The Adaptive Markets Hypothesis 180
The AMH’s Five Practical Implications 182
The AMH and Integrative Investment Theory 182
CHAPTER 28 Professor Malkiel and the New Investment Paradigm: Raining on the Parade? 184
Raining on the ‘‘New Paradigm’’ Parade? 184
The Bases for Malkiel’s Skepticism 185
An Alternative Conclusion 186
Winning Evidence 187
The ‘‘Good Governance’’ Boost 188
We’re Both Right 189
CHAPTER 29 The ‘‘Post-Bubble Blues Decade’’: A Progress Report 190
Another Nail in the IID Coffin 190
Why Non-IID Logic Wins 191
Investment Regimes in the Real World 192
What Seems to Actually Be Happening? 193
Some Actual Numbers 194
The Bottom Line 195
PART FIVE Risk in Pension Plans
CHAPTER 30 Rethinking Funding Policy and Regulation: How Should Pension Plans Be Financed? 199
The Devil in the Details 199
How Many Course-Correction Tools? 200
Making Financing Decisions: In Whose Interest? 201
An Analytical Framework for Assessing DB Plan Financing
Decisions 202
‘‘Rational’’ Explanations 203
Four Principles to Fund By 204
CHAPTER 31 Funding Policy and Investment Policy: How Should They Be Integrated in DB Pension Plans? 206
Principles to Fund and Invest By 206
What Makes DB Pension ‘‘Contracts’’ Risky? 208
Should DB Funding Target Calculations Assume That More
Risk Means More Return? 208
Is Current ‘‘Accepted Actuarial Practice’’ Unacceptable? 209
What Is an ‘‘Acceptable Level of Certainty’’? 210
Surplus Ownership 211
Cleaning Up Our Act 212
CHAPTER 32 Resurrecting Ranva: Adjusting Investment Returns for Risk 213
Resurrecting RANVA 213
RANVA in 1998 214
Measuring RANVA in the Real World 215
The 2000 to 2004 Experience: Lessons 216
Remaining Barriers 217
CHAPTER 33 Adjusting Investment Returns for Risk: What’s the Best Way? 219
Resurrecting RANVA 219
The ‘‘Cost of Market Volatility’’ Approach 220
The ‘‘Cost of Insurance’’ Approach with Risk Buffers 222
The ‘‘Cost of Insurance’’ Approach with Put Options 223
PART SIX Measuring Results
CHAPTER 34 Pension Plan Organizations: Measuring ‘‘Competitiveness’’ 227
Pension Plan Organizations and ‘‘Legitimacy’’ 227
‘‘Provider of Choice’’ for Which Services? 228
Benchmarking Pension Services 229
Costing the Benefit Administration ‘‘Business’’ 229
The Benefit Administration Cost Equation 231
Build or Buy? 232
CHAPTER 35 Measuring DC Plans as ‘‘Value Propositions’’: The New Imperative for Plan Sponsors 233
Silk Purses from Sows’ Ears 233
Measures of ‘‘Prudence’’ 234
The ‘‘Own-Company Stock’’ Phenomenon 234
Understanding DC Plan Total Returns 235
DC versus DB Plan Cost Performance 237
Other DC Plan Performance Metrics 239
‘‘Value Proposition’’: Yes or No? 239
CHAPTER 36 Measuring Pension Fund Behavior (1992 to 2004): What Can We Learn? 240
A Well-Endowed Database 240
Current International Investment Policy and Implementation
Style Differences 241
Ten-Year Investment Policy and Implementation Style
Trends for U.S. Funds 242
Did Active Management Add Value? 243
The Selection ‘‘Alphas’’: Good News and Bad News 244
Is There Also a Payoff from Actively Managing Pension Fund Costs? 247
Two Important Lessons Learned Thus Far 249
PART SEVEN Pensions, Politics, and the Investment Industry
CHAPTER 37 Whither Security Analysis? 253
Bubble, Bubble, Toil and Trouble 253
Fortune Trashes Wall Street 254
Is Better Regulation the Answer? 255
Reversing the Financial Food Chain 256
What Is Security Analysis, Anyway? 257
Even Good Security Analysis Needs Context 257
Effective ‘‘Buy-Side’’ Structures 258
In Conclusion 259
CHAPTER 38 Pension Funds and Investment Firms: Redefining the Relationship 260
Who Are the Simbas of the Pension Investment Kingdom? 260
The Money Flood 261
A Question of Governance 261
Enter the Anthropologists 262
A Call to ‘‘Excellence’’ 263
What Do ‘‘Excellent’’ Pension Funds Look Like? 264
A Supplier-Driven Market 265
The Tiny Equity Risk Premium Factor 265
‘‘New Paradigm’’ Pension Funds: What Kind of Investment
Services Do They Want? 267
New Pension Fund–Investment Firm Partnerships 270
Could You Be a ‘‘New Paradigm’’ Player? 271
CHAPTER 39 The New Pension Fund Management Paradigm: Feedback from Financial Analysts 272
Test Driving the New Paradigm 272
Pension Politics and Economics 273
Pension Plan Governance 276
The New Pension Fund Management Paradigm 277
Putting the Paradigm in Practice 278
Performance Measurement 281
Did the Yardsticks Move Forward or Backward? 282
CHAPTER 40 Reconnecting GAAP and Common Sense: The Cases of Stock Options and Pensions 283
Closing the Information GAAP 283
When Are Employee Stock Options ‘‘Expenses’’? 284
The Common-Sense Solution in Action 285
Current Pension Accounting Rules Defy Common Sense, Too 285
Sensible Pension Accounting Rules 287
Common Sense in Action 288
Carpe Diem 289
CHAPTER 41 Is Sri Bunk? 290
SRI and Zen 290
What Is ‘‘Socially Responsible Investing’’? 290
A Slippery Slope? 291
Sustainable Investing 292
Assessing the Sustainability of Dividend Growth 293
From Saying to Doing: A Case Study 294
Redefining the SRI Revolution 294
CHAPTER 42 Alpha, Beta, Bafflegab: Investment Theory as Marketing Strategy 296
Giving Alpha and Beta a Rest 296
The Beautiful Art of Language 297
The Myth of ‘‘Absolute-Return Investing’’ 298
Investment Theory with the End in Mind 298
The Critical Role of Fund Governance 299
Pension Revolution 300
CHAPTER 43 The Turner Pensions Commission Report: A Blueprint for Global Pension Reform 302
Pension Wisdom from the United Kingdom 302
Turner’s Recommendations 303
The Power of Integrative Thinking 303
Blueprint for Global Pension Reform 304
NPSS Governance, Management, and Investment
Options 307
Moving Forward 308
CHAPTER 44 More Pension Wisdom from Europe: The Geneva Report on Pension Reform 309
Eight Hands, Four Economists, and One Point of View 309
Powerful Pension Policy Implications 310
Labor Markets and Human Capital 311
Optimal Risk Sharing 312
Optimal Pension Fund Organizations 313
A Powerful Pension Vision 314
PART EIGHT The Case of PERS
CHAPTER 45 PERS and the Pension Revolution: Active Participant . . . or Passive Bystander? 317
Alyson Green’s New Job 317
History of Workplace Pensions 319
The 1976 to 2005 Period 319
Governance–Organizational Issues at PERS 320
Finance–Investment Beliefs 321
Pension Contract–Risk Issues at PERS 321
Is a Higher Contribution Rate the Answer? 323
More Drastic Action Indicated 324
Spreading the Pain Evenly 326
Is Risk-Sharing an Essential Pension Plan Feature? 327
Getting from Here to There 329
Devising an Action Plan 329
CHAPTER 46 Advice for Alyson Green: How PERS Can Join the Pension Revolution 331
Case Discussion Summary from October 25, 2005 331
The PERS Situation 332
The PERS Debate 332
In Conclusion: A Call to Arms 335
