Pension Revolution E-Book

Keith P. Ambachtsheer

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Serie: Wiley Finance Editions
• Sprache: Englisch

Seitenzahl: 557

Veröffentlichungsjahr: 2011

Beschreibung

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

Leseprobe

Contents

Preface: Peter Drucker’s Pension Revolution: Here at Last

Introduction: Why a Pension Revolution Now?

The Trouble with DB Plans

DC Plans Are Not the Answer Either

Expert Pension Co-ops

TOPS Tipping Points

PART ONE: The Pension Revolution: Touchstones

CHAPTER 1: Are Pension Funds “Irrelevant”?

An “Unreasonable” Actuary?

Exley’s Four Irrelevance Propositions

So What Is Relevant?

Responding to Exley

Relevant Pension Funds: Building the Case

Managing Retirement Income Risks

Leveling the Informational Playing Field

Getting the Execution of the Idea Right

CHAPTER 2: The Pension Revolution—Are You a Believer Yet?

A Revolutionary Reordering of the Pensions Firmament

From Fuzzy Pension Deals to “Risk-Sharing Co-ops”

Toward Pension “Business Models” That Work: The Risk Issue

Toward Pension “Business Models” That Work: The Scale Issue

The Pension Governance Issue

Two Role Models

Great Treasures?

CHAPTER 3: After the Perfect Pension Storm: What Now?

From Vegas to Oxford: In Search of Answers

Do Nothing or Something?

The Corporate Context: Two Basic Choices

New DC Plan “Business Model” Also Needed

The Industry/Public-Sector Pension Context

The “Fair Value” Question

Better Public Pensions Policy

CHAPTER 4: Beyond Portfolio Theory: The Next Frontier

Investment Theory’s Next Frontier: The Academic View

Investment Theory’s Next Frontier: Two Further Considerations

The Next Frontier: “Integrative Investment Theory”

CHAPTER 5: The United Airlines Case: Tipping Point for U.S. Pension System?

The United Airlines Case

A Good Question and Two Very Different Answers

ERISA’s “Sole Interest” Rule

Lessons from Abroad

Searching for “Supreme” Answers

The UAL Case in Context

CHAPTER 6: Peter Drucker’s Pension Revolution After 30 Years: Not Over Yet

Two Unfashionable Themes

Politico-Agency Issues

Pension Contract and Risk Issues

Investment Beliefs

Pension Fund Governance

Still Much Work to Do

CHAPTER 7: Winning the Pension Revolution: Why the Dutch Are Leading the Way

The Globe’s Number One Pensions Country

Culture, Compactness, and Leadership

Regulatory Leadership

Research Leadership

A Remaining Challenge: Solving the Organization Design Puzzle

What About the Other Pensions Countries?

CHAPTER 8: Pension Reform: Evolution or Revolution?

A Pension “Tipping Point” Indeed

What Should Happen?

Pension Reform in the United States

Pension Reform Elsewhere

Pension Reform: Evolution or Revolution?

PART TWO: Building Better Pension Plans

CHAPTER 9: Can Game Theory Help Build Better Pension Plans?

Pension Games

Why do Pension Game Switches Occur?

Who Are the Stakeholders and What do They Want?

Sources of Risk in Pension Schemes

Mitigating Micro Risks

Can We Mitigate Macro Risks?

Is Investment Risk Worth Taking in DB Plans?

Can Game Theory Build Better Pension Plans?

CHAPTER 10: If DB and DC Plans Are Not the Answers, What Are the Questions?

From Answers to Questions

Ultimate Pension Questions and Their Consequences

Underwriting Pension Mismatch Risk: Any Volunteers?

Should Pension Mismatch Risk Be Minimized?

Pension-Delivery Institutions

Benchmarking Traditional DB and DC Plans

The Way Ahead

CHAPTER 11: Human Foibles and Agency Dysfunction: Building Pension Plans for the Real World

Some Fundamental Questions First

Back to First Principles

Human Foibles

Agency Issues

Counteracting Human Foibles

Minimizing Agency Costs

TOPS, Employers, and Public Policy

TOPS and DB Plans

CHAPTER 12: DB Plans and Bad Science

Science and the Design of Pension Contracts

The TOPS Contract

Taking on Investment Risk: Implications

Is Investment Regime Risk Insurable?

Intergenerational Bargaining

Robust Course-Correction Mechanisms Required

The Flawed DB Model

Bad Science

CHAPTER 13: Peter Drucker’s Pension Legacy: A Vision of What Could Be

Two Handshakes to Remember

The Melbourne Message

TOPS: Neither DC nor DB

TOPS and Investing

TOPS and Governance

TOPS and the Real World

The Drucker Visit

PART THREE: Pension Fund Governance

CHAPTER 14: Reinventing Pension Fund Management: Easier Said than Done

A Paradigm Shift?

Novelties of Fact

Novelties of Theory

Pension Industry Responses

Crossing the “Innovation Chasm”

CHAPTER 15: Should (Could) You Manage Your Fund Like Harvard or Ontario Teachers’?

Four Things in Common

Legal Foundations: Solid or Not?

Governance and Management: Understanding the Difference

Investment Beliefs: Theirs or Yours?

Investment Processes: Like Wall Street?

Should You Manage Like HMC or OTPP?

Could You Manage Like HMC or OTPP?

CHAPTER 16: “Beauty Contest” Investing: Not Dead Yet

“Deja Vu All Over Again”

Why “Beauty Contest Investing” Is Ugly

Integrative Investment Theory

Investment Beliefs

Managing from the Inside Out

CHAPTER 17: Eradicating “Beauty Contest” Investing: What It Will Take

The Ugliness of “Beauty Contest” Investing

A Two-Pronged Eradication Strategy

What Corporations Must Do

What Investing Institutions Must Do

A Debilitating Pension Fund Governance Problem

Light at the End of the “Beauty Contest” Tunnel?

CHAPTER 18: High-Performance Cultures: Impossible Dream for Pension Funds?

Thinking and Acting Like Goldman Sachs

New Research Results

Specific Governance and Management Challenges

In Conclusion

CHAPTER 19: How Much Is Good Governance Worth?

Governance Quality and Organization Performance Should Be Related

A Road Map for the Journey of Discovery

The Pension CEO Score and NVA Metrics: The Data

Pension CEO Scores Meet NVA Metrics

Further Insights

The Value of Good Governance

PART FOUR: Investment Beliefs

CHAPTER 20: The 10 Percent Equity Return Illusion: Possible Consequences

Consequential Miscalculations

Why 10 Percent Doesn’t Work

Painted into an Awkward Corner?

Consequences

CHAPTER 21: Stocks for the Long Run?. . . or Not?

A Debate with Jeremy Siegel

How Investment Theory Became Investment Practice

What Is Wrong with These “Proofs”

What if “Reality” Is Not a Random Walk?

Investment Regimes, Dividend Yields, and ERPs

The Post-Bubble Blues Decade

CHAPTER 22: “Persistent Investment Regimes” or “Random Walk”? Even Shakespeare Knew the Answer

The Ambachtsheer-Siegel Debate Revisited

History on Our Side

The Investment Returns Story: How to Tell It

The “Investment Regime” Game: Spot Today’s Well Before It’s Over, and Tomorrow’s Before It’s Gone on Too Long

“Regime Spotting” versus “Random Walk”: Which Is More Useful?

Theory on Our Side, Too

Fellow Travelers

CHAPTER 23: The Fuss about Policy Portfolios: Adrift in Institutional Wonderland

Tempest in a Teapot. . . or Not?

Duality in Finance: A Brief History

Financial Duality in Pension and Endowment Funds: Building the Conceptual Framework

New Insights from the CEM Database

Enter Organizational Dysfunction

Decisions by Default

CHAPTER 24: Shifting the Investment Paradigm: A Progress Report

The “Policy Portfolio” Debate Continues

A Lens to See the World

Why the “Old” Lens Distorts

A Varying Equity Risk Premium

A New Lens

A Higher Level of Thinking

Glimmers of Light

CHAPTER 25: Whose “Investment Beliefs” Do You Believe?

Writing an “Investment Beliefs” Statement

Inferring Beliefs from Actions

Measuring Predictive Ability

What about Market Timing and Strategic Asset Allocation?

Expected ERP Powerful Predictor

Enter Woody Brock

In Conclusion

CHAPTER 26: Our 60-40 Asset Mix Policy Advice in 1987: Wise or Foolish?

Why Roll the Clock Back 20 Years?

Leibowitz’s Immunization Campaign

Investment Beliefs in 1987

Investment Beliefs in 1997

The Right Kind of Active Management

Wise or Foolish?

CHAPTER 27: “But What Does the Turtle Rest On?” A Further Exploration of Investment Beliefs

“But What Does the Turtle Rest On?”

The Efficient Markets Hypothesis: Fact or Fiction?

The Three Strikes against the EMH

Economists and “Operationally Meaningful Theorems”

The Adaptive Markets Hypothesis

The AMH’s Five Practical Implications

The AMH and Integrative Investment Theory

CHAPTER 28: Professor Malkiel and the New Investment Paradigm: Raining on the Parade?

Raining on the “New Paradigm” Parade?

The Bases for Malkiel’s Skepticism

An Alternative Conclusion

Winning Evidence

The “Good Governance” Boost

We’re Both Right

CHAPTER 29: The “Post-Bubble Blues Decade”: A Progress Report

Another Nail in the IID Coffin

Why Non-IID Logic Wins

Investment Regimes in the Real World

What Seems to Actually Be Happening?

Some Actual Numbers

The Bottom Line

PART FIVE: Risk in Pension Plans

CHAPTER 30: Rethinking Funding Policy and Regulation: How Should Pension Plans Be Financed?

The Devilin the Details

How Many Course-Correction Tools?

Making Financing Decisions: In Whose Interest?

An Analytical Framework for Assessing DB Plan Financing Decisions

“Rational” Explanations

Four Principles to Fund By

CHAPTER 31: Funding Policy and Investment Policy: How Should They Be Integrated in DB Pension Plans?

Principles to Fund and Invest By

What Makes DB Pension “Contracts” Risky?

Should DB Funding Target Calculations Assume That More Risk Means More Return?

Is Current “Accepted Actuarial Practice” Unacceptable?

What Is an “Acceptable Level of Certainty”?

Surplus Ownership

Cleaning Up Our Act

CHAPTER 32: Resurrecting Ranva: Adjusting Investment Returns for Risk

Resurrecting RANVA

RANVA in 1998

Measuring RANVA in the Real World

The 2000 to 2004 Experience: Lessons

Remaining Barriers

CHAPTER 33: Adjusting Investment Returns for Risk: What’s the Best Way?

Resurrecting RANVA

The “Cost of Market Volatility” Approach

The “Cost of Insurance” Approach with Risk Buffers

The “Cost of Insurance” Approach with Put Options

PART SIX: Measuring Results

CHAPTER 34: Pension Plan Organizations: Measuring “Competitiveness”

Pension Plan Organizations and “Legitimacy”

“Provider of Choice” for Which Services?

Benchmarking Pension Services

Costing the Benefit Administration “Business”

The Benefit Administration Cost Equation

Build or Buy?

CHAPTER 35: Measuring DC Plans as “Value Propositions”: The New Imperative for Plan Sponsors

Silk Purses from Sows’ Ears

Measures of “Prudence”

The “Own-Company Stock” Phenomenon

Understanding DC Plan Total Returns

DC versus DB Plan Cost Performance

Other DC Plan Performance Metrics

“Value Proposition”: Yes or No?

CHAPTER 36: Measuring Pension Fund Behavior (1992 to 2004): What Can We Learn?

A Well-Endowed Database

Current International Investment Policy and Implementation Style Differences

Ten-Year Investment Policy and Implementation Style Trends for U.S. Funds

Did Active Management Add Value?

The Selection “Alphas”: Good News and Bad News

Is There Also a Payoff from Actively Managing Pension Fund Costs?

Two Important Lessons Learned Thus Far

PART SEVEN: Pensions, Politics, and the Investment Industry

CHAPTER 37: Whither Security Analysis?

Bubble, Bubble, Toil and Trouble

Fortune Trashes Wall Street

Is Better Regulation the Answer?

Reversing the Financial Food Chain

What Is Security Analysis, Anyway?

Even Good Security Analysis Needs Context

Effective “Buy-Side” Structures

In Conclusion

CHAPTER 38: Pension Funds and Investment Firms: Redefining the Relationship

Who Are the Simbas of the Pension Investment Kingdom?

The Money Flood

A Question of Governance

Enter the Anthropologists

A Call to “Excellence”

What Do “Excellent” Pension Funds Look Like?

A Supplier-Driven Market

The Tiny Equity Risk Premium Factor

“New Paradigm” Pension Funds: What Kind of Investment Services Do They Want?

New Pension Fund–Investment Firm Partnerships

Could You Be a “New Paradigm” Player?

CHAPTER 39: The New Pension Fund Management Paradigm: Feedback from Financial Analysts

Test Driving the New Paradigm

Pension Politics and Economics

Pension Plan Governance

The New Pension Fund Management Paradigm

Putting the Paradigm in Practice

Performance Measurement

Did the Yardsticks Move Forward or Backward?

CHAPTER 40: Reconnecting GAAP and Common Sense: The Cases of Stock Options and Pensions

Closing the Information GAAP

When Are Employee Stock Options “Expenses”?

The Common-Sense Solution in Action

Current Pension Accounting Rules Defy Common Sense, Too

Sensible Pension Accounting Rules

Common Sense in Action

Carpe Diem

CHAPTER 41: Is Sri Bunk?

SRI and Zen

What Is “Socially Responsible Investing”?

A Slippery Slope?

Sustainable Investing

Assessing the Sustainability of Dividend Growth

From Saying to Doing: A Case Study

Redefining the SRI Revolution

CHAPTER 42: Alpha, Beta, Bafflegab: Investment Theory as Marketing Strategy

Giving Alpha and Beta a Rest

The Beautiful Art of Language

The Myth of “Absolute-Return Investing”

Investment Theory with the End in Mind

The Critical Role of Fund Governance

Pension Revolution

CHAPTER 43: The Turner Pensions Commission Report: A Blueprint for Global Pension Reform

Pension Wisdom from the United Kingdom

Turner’s Recommendations

The Power of Integrative Thinking

Blueprint for Global Pension Reform

NPSS Governance, Management, and Investment Options

Moving Forward

CHAPTER 44: More Pension Wisdom from Europe: The Geneva Report on Pension Reform

Eight Hands, Four Economists, and One Point of View

Powerful Pension Policy Implications

Labor Markets and Human Capital

Optimal Risk Sharing

Optimal Pension Fund Organizations

A Powerful Pension Vision

PART EIGHT: The Case of PERS

CHAPTER 45: PERS and the Pension Revolution: Active Participant. . . or Passive Bystander?

Alyson Green’s New Job

History of Workplace Pensions

The 1976 to 2005 Period

Governance–Organizational Issues at PERS

Finance-Investment Beliefs

Pension Contract–Risk Issues at PERS

Is a Higher Contribution Rate the Answer?

More Drastic Action Indicated

Spreading the Pain Evenly

Is Risk-Sharing an Essential Pension Plan Feature?

Getting from Here to There

Devising an Action Plan

CHAPTER 46: Advice for Alyson Green: How PERS Can Join the Pension Revolution

Case Discussion Summary from October 25, 2005

The PERS Situation

The PERS Debate

In Conclusion: A Call to Arms

Additional Praise for Pension Revolution

“The tectonic plates of governance reform have totally transformed the landscape of governance in publicly traded corporations. Now, Ambachtsheer challenges the owners of those corporations, the institutional investors, to examine themselves and to reform their own fiduciary practices.”

—David Beatty, Managing Director, Canadian Coalition for Good Governance, Canada

“I discovered Keith Ambachtsheer’s cutting-edge ideas and thinking a decade ago, and only wish I had discovered him sooner. Ambachtsheer offers intelligent and practical strategic thinking about pension governance, benefit design, and investment policy. If you are struggling with the pension crisis, you owe it to yourself to read the Pension Revolution.”

—David Blitzstein, Director, Negotiated Benefits Department, United Food & Commercial Workers International Union, U.S.A.

“Retirement plans are a critical part of both the social systems and the financial systems of the free world. They are failing on both counts. Turning failure to success will be no mean task, and there is no better place to begin than Pension Revolution. It demands your attention.”

—Jack Bogle, Founder and Former CEO, The Vanguard Group, U.S.A.

“Over the years, Keith Ambachtsheer has triggered pension funds around the world with ground breaking initiatives like CEM and his insightful ‘Ambachtsheer Letters.’ This book is no exception to this impressive tradition. The issues raised in this book should be in the forefront of the minds of trustees, pension professionals and regulators. Pension Revolution will definitely be one of the key contributions to the pension debate and the challenge to design sustainable pension systems.”

—Else Bos, CEO, PGGM Investments, The Netherlands

“Yet another revolution in pensions! This one is about the very future of private pensions, their design, benefits, funding and the distribution of risk. As we would expect from Keith Ambachtsheer, this book combines perceptive and informed assessment of the issues with a way forward. This is nothing short of Drucker’s world re-written for the twenty-first century.”

—Gordon Clark, Professor of Geography and Director of the Oxford University Centre for the Environment, Oxford University, U.K.

“Financing retirement income has reached crisis proportions around the world. Keith has thought as much as anyone about how to best redeem and redefine societies’ vital, yet frail structures for delivering income to workers once they retire. Here in one place you get the benefit of that accumulated wisdom.”

—Richard Ennis, Co-founder and Chairman, Ennis Knupp + Associates, U.S.A., and Editor, Financial Analysts Journal

“I have known and worked with Keith for many years and look forward to the next chapter in his analysis of the pension fund business. I anticipate a thought provoking “solution” which will no doubt impact how many of us think about our business going forward.”

—Nancy Everett, President and Chief Executive Officer, General Motors Asset Management, U.S.A.

“While I don’t necessarily agree with all of Keith’s pension revolution conclusions and proposed solutions, I do believe there is great value in seriously considering the issues. This thought-provoking book makes a substantial contribution to promoting that highly desirable end result.”

—Gary Findlay, Executive Director, Missouri State Employees’ Retirement System, U.S.A.

“A cure for pension ills? Founded on problems so well defined and incorporating relevant factors so well described in his earlier works, Keith’s Pension Revolution is surely an excellent prescription. Whether it is a cure is up to those of us with oversight responsibilities.”

—Michael Grandin, Corporate Director and former Dean, Haskayne School of Business, University of Calgary, Canada

“Keith Ambachtsheer is one of the few pension thinkers consistently worth (re-)reading. His writings push all stakeholders towards clarity of purpose, governance, measurement, expression, and execution. Ineluctably his TOPS model offers a new vision for future pension deals.”

—Jack Gray, Global Investment Strategist, GMO Australia Limited and Advisor to Sunsuper, Australia

“When it comes to investment and pension funds, Keith has spend more time than anyone thinking, researching, writing and talking about how to get better investment performance and pension outcomes. Pension systems around the world are at a crossroad. The book is a must read for decision makers as well as plan participants.”

—Claude Lamoureux, President & Chief Executive Officer, Ontario Teachers’ Pension Plan, Canada

“No one in the world knows more about Pension Funds than Keith Ambachtsheer. Pension Revolution exactly elucidates the causes of the global pension crisis and offers a comprehensive blueprint for pension reform.”

—Burton Malkiel, Professor of Economics, Princeton University, U.S.A., and author of “A Random Walk Down Wall Street”

“As a keen reader of Keith’s ‘Ambachtsheer Letters,’ I know his writings to be thought-provoking, bar-raising, and innovative. His new book is a ‘must-read’ for anyone involved in pension fund management. Putting his ideas in practice will benefit pension plan members around the world.”

—Roderick Munsters, Chief Investment Officer, ABP Pensionfund, The Netherlands

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Copyright © 2007 by Keith P. Ambachtsheer. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Ambachtsheer, Keith P.

Pension revolution : a solution to the pensions crisis / Keith Ambachtsheer.

p. cm. – (Wiley finance series)

ISBN-13: 978-0-470-08723-7 (cloth)

ISBN-10: 0-470-08723-4 (cloth)

1. Pension trusts. 2. Pension trusts—Management. 3. Pension trusts—Investments. I. Title.

HD7105.4.A63 2007

331.25’22—dc22

2006024003

To Peter Drucker, who foresaw the pension revolution thirty years ago

and

To Virginia Atkin, who provided the inspiration to see this project through.

Preface: Peter Drucker’s Pension Revolution: Here at Last

Peter Drucker’s prescient pensions book The Unseen Revolution: How Pension Fund Socialism Came to America was first published in 1976. A decade later, I would write my own pensions book, Pension Funds and the Bottom Line. Another decade later, I co-authored a second book, Pension Fund Excellence, with Don Ezra. So chronologically, this new book, Pension Revolution, is right on schedule, arriving almost 10 years after Pension Fund Excellence, 20 years after Pension Funds and the Bottom Line, and 30 years after Drucker’s original book, The Unseen Revolution. Why this third book now? Because I believe that the adverse events of the first half of this new decade have finally created the winning conditions to realize the pensions vision Drucker first articulated 30 years ago. The serious design shortcomings of traditional defined benefit (DB) and defined contribution (DC) pension plans have now been bared for all to see, as have the shortcomings of an investment paradigm based on the belief that “in the long run” heavy weightings in equities will always save the day. Rather than responding constructively to the events of the last five years, most pension plan sponsors, legislators, and regulators around the globe, as well as most experts from the actuarial, accounting, and legal professions have done little more than wring their hands as the foundations on which the old pension paradigm was constructed have crumbled.

Of equal importance is the light that the 2001 to 2005 experience has shed on the pension fund “legitimacy” question that Drucker raised 30 years ago. Even in pension plans where there is understanding that the old pension paradigm is dead, and that a new pension paradigm is needed, change for the better has been slow and difficult to achieve. Why? Sometimes internal principal-agent conflicts between managers and workers have gotten in the way, usually in corporate DB plans contexts. Sometimes game theory-related conflicts have broken out between various pension plan stakeholder groups, usually in public sector DB plan contexts. These agency-related blockages to improving pension arrangements are often exacerbated by pension laws, as well as by regulatory and governance processes that are still not up to the task. These realities suggest that Drucker’s 30-year old “legitimacy” question has yet to be answered affirmatively. But now there is a difference. The 2001 to 2005 experience has shown the old pension paradigm to be fatally vulnerable to adversity, and in urgent need of renewal. This book offers a response to these realities that is both revolutionary and thoroughly practical at the same time.

I wrote my first book in 1985 as a practical decision guide for the pension trustees and executives of corporate pension plans. However, the book’s final chapter was titled “The Private Pension System Challenge: Achieving ‘Legitimacy.”’ In it, I reiterated Drucker’s warning from 10 years earlier that pension systems do not exist in a political vacuum. If independently and expertly governed, pension funds can become the enlightened means by which workers secure their retirement through ownership of the means of production, and by which new retirement savings are converted into new wealth-creating capital. Through this virtuous process, the historical contradictions between capitalism and socialism would finally fall away. On the other hand, poorly governed pension funds, in the hands of agents with their own agendas, have no hope of achieving the “legitimacy” required to play the dual role of providers of retirement income, and owners of the means of production. Drucker warned that the “enlightened” outcome was by no means assured. It would only come about if the “independently and expertly governed” condition became a general pension fund rule, rather than the exception.

The launch of my 1985 book was followed by the launch of KPA Advisory Services Ltd., my advisory publication The Ambachtsheer Letter, and CEM Benchmarking Inc. The goals of the businesses and the publication were to offer strategic research and advice on pension governance, finance, and investment issues consistent with both Drucker’s “legitimacy” vision and with my own evolving views on pension finance and investment theory, and to benchmark the organizational performance of pension funds. As time passed into the 1990s, I found myself returning time and again to the central importance of Drucker’s “legitimacy” requirement and its implication that pension funds should be established as well-governed, “arm’s-length,” single-purpose entities. It was the interactive process of research, debate, discovery, and hands-on advisory assignments that led to the second book with Don Ezra in 1998 titled Pension Fund Excellence: Creating Value for Stakeholders. While this book provided valuable new information and opinion into areas such as investment beliefs and pension balance-sheet management, its most valuable and lasting contribution was to provide new insights into the agency and governance issues that continued to confound much of the globe’s pension fund “industry” through the 1990s, and continues to confound it to this day.

Through a series of 44 chapters originally written as letters for clients of KPA Advisory Services, this new Pension Revolution book tells the story of my personal transformation from a pension “evolutionary” to a pension revolutionary over the course of the last five years. With the editorial assistance of Caroline Cakebread and my friends at Wiley, the organizational skills of Ann Henhoeffer, and the technical assistance of Hubert Lum, the letters have been updated, edited, and converted into a logical sequence of chapters organized into seven broad themes. These themes range from the politics of pensions, to building better pension plans, to addressing pension agency and governance issues, to articulating believable investment beliefs, to managing risk in pension plan contexts, and to measuring results in ways that matter. Each chapter has its own stand-alone message, and thus can be read on its own merit. Reading the chapters chronologically within each theme allows readers to see how the key ideas within each theme have evolved over the course of the last five years. The structure of the seven part themes themselves resulted from taking an integrative approach to first articulating the status of the pension revolution early in the twenty-first century, and then to showing how it can now be brought to a successful conclusion by consciously building true pension fund “legitimacy.” The results are indeed revolutionary. A new, conflict-free pension design named TOPS: The Optimal Pension System emerges. Clearer guidelines for resolving internal and external agency issues are identified, as are sharper, more effective pension governance principles. Investment beliefs reflecting both common sense and new academic research are deduced. Risk is connected to uncertainty about future consumption, and then made operational through risk budgets. Performance measurement is connected to what should be managed. Revolutionary indeed!

A final section of the book pulls all of the “legitimacy” elements together through a case study of the Public Employee Retirement System (PERS), a very typical public sector DB plan grappling with a very typical set of plan design, agency, governance, risk measurement, management, and disclosure issues. The case description and discussion are among the first tangible fruits of the newly founded Rotman International Centre for Pension Management (ICPM) at the University of Toronto. Sponsored by 17 of the globe’s thought-leading pension organizations, ICPM’s mission is to apply integrative thinking and research to helping pension organizations raise their “legitimacy” in the eyes of their own stakeholders and of the public at large.

Peter Drucker would be pleased.

Keith Ambachtsheer

Toronto, Canada

September 2006

Introduction: Why a Pension Revolution Now?