Pension revolution : a solution to the pensions crisis

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Pension revolution : a solution to the pensions crisis

Keith P. Ambachtsheer

Wiley, c2007

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Praise 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, Aging, and Retirement, Tilburg University, The Netherlands "Pension Revolution exposes the inadequacies of current pension systems and persuasively makes the case for the fundamental changes that are needed. It is essential reading for both the pension industry and policymakers." --Elizabeth Bryan, Chair, Investment Committee, Unisuper Management PM Ltd, Australia "Most analyses of complicated issues deal with complexity by simplifying or only looking at one piece-part, and, in doing so, provide limited value. In stark contrast, Keith Ambachtsheer boldly wades into the complexity in Pension Revolution to come up with a valuable integrative solution. He is a most welcome revolutionary!" --Roger Martin, Dean, Joseph L. Rotman School of Management, University of Toronto, Canada "We have known Keith for over ten years, and consistently over that time, he has constructively and comprehensively challenged conventional wisdom. He has done this so effectively that many of his initial thoughts have now become universally accepted norms. Such is his energy however that he continues to push the boundaries of pension and investment thinking." --Peter Moon, Chief Investment Officer, Universities Superannuation Scheme Ltd, UK "Pension Revolution not only explains the shortcomings of the existing pension system and the underlying design features that have resulted in the current pension upheaval. It also offers thoughtful and creative suggestions for prospective pension design. A must-read for anyone interested in the future of retirement finance." --James Poterba, Professor of Economics, Massachusetts Institute of Technology and a member of the TIAA-CREF Board of Trustees

目次

Preface: 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 ''Dej `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

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