Keith Ambachtsheer

• Managing Director at University of Toronto

Like the defined-ambition (DA) pension plans gaining popularity in Europe, target-benefit (TB) plans are becoming more familiar in the United States and Canada. TB plans are designed to fill the gap between pillar one pensions (e.g., social security, OAS/CPP, etc.) and the actual living costs required to maintain a worker's standard of living. Howe...

Categorizing risks in a known to unknown spectrum is instructive. In this context, climate change has been steadily moving from the unknown to the known end of the spectrum. A recent study by Mercer has been helpful in this regard. It posits three climate change scenarios and three risk drivers within those scenarios. The resulting analysis provide...

In order to infuse pension reform with innovative thinking, we must stop thinking of pensions as a binary system limited to defined-benefit (DB) or defined-contribution (DC) plans. New pension designs, called defined-ambition (DA) or target-benefit (TB) plans, set target pensions and then work backwards to estimate their cost and to allocate and co...

There are a number of ways to evaluate the effectiveness of a pension fund. By comparing public pension organizations in Norway and Canada, it becomes clear that it is not appropriate to benchmark these types of funds against smaller funds, like university endowments. When comparing funds, it is useful to refer to Peter Drucker's elements of organi...

Investment beliefs should be based on realistic theories and confirmed by how markets actually behave. These beliefs must be clearly articulated and consistently applied in setting investment policy and in making investment decisions. The big challenge for pension funds today is adapting investment beliefs to 21st century realities. These realities...

Organizational culture can have a material impact on a pension funds' performance, for better or for worse. Bad culture was the driving force behind some of the biggest corporate collapses in recent memory, including American International Group (AIG), and Lehman Brothers. There are ways to foster a good culture in pension organizations, which will...

Modern portfolio theory (MPT) posits that if investors could specify their reward/risk expectations and risk tolerance, it becomes possible to identify the optimal portfolio for them. The global financial crisis reminded us that there is a lot more to risk management than simply applying the rules of MPT. This chapter identifies three real-world is...

Compensation of pension organization employees is an integral part of strategy. A survey of pay practices in the investment functions of 37 pension funds provides a picture of the range of approaches. Four major factors help explain compensation: 1) fund characteristics such as mission and size, 2) asset allocation, 3) compensation philosophy, and...

For a pension fund to be successful, it must have clear investment beliefs to formulate the strategies that will achieve the organization's mission. For the organization's board and senior management, articulating such beliefs is a key element in discharging their fiduciary duties. Investment beliefs should be articulated in a way that both the lon...

Nobel Prize Laureate Paul Samuelson asserts that useful economic theorems are based on actual human behavior rather than abstract theory. So useful investment theories will reflect investors' appetites for high returns over the long-term, and for payment-safety in the shorter term. Using this distinction, the chapter asks if modern investment theor...

The Integrated Reporting ( ) initiative provides a globally accepted framework for integrative reporting by corporations. This framework should also be adopted by pension organizations themselves. Integrative reporting takes a holistic view, encouraging organizations to maintain a long-term outlook. By keeping a strategic focus on sustainability an...

This chapter relates Thomas Piketty's conclusions on the possible dynamics of 21st century global wealth distribution to pension economics and the role of pension funds. It contrasts Piketty's patrimonial capitalism with Drucker's pension capitalism. The chapter concludes that despite the fact pension assets only represent about 10 percent of total...

Prior chapters noted both the power of long-term investing and a growing awareness of this reality in the global community. However, a material shift towards long-termism and away from short-termism will require that we rethink measuring performance. The Integrated Reporting initiative described in Chapter 12 offers a useful macro rethinking framew...

Before pension system design can be improved, people will need to change the way they think about the challenge. Adversarial bargaining, conflicts of interest, and shortsightedness are all factors to be considered in building win-win pension arrangements. The risk-free arbitrage test from financial economics is a useful tool in determining the fair...

The 21st century presents many challenges that the designers of traditional pension plans did not address. Outdated defined-benefit (DB) and defined-contribution (DC) plan designs need to be replaced by new designs that are more sustainable. To achieve their post-work income replacement goals in the 21st century, these new pension designs must adap...

There is a logical connection in any organization between governance quality and the production of value for stakeholders. However, saying it is one thing, demonstrating it empirically is something else. A study summarized in this chapter does just that. It finds that highly involved corporate boards of directors, properly structured incentive comp...

A pension fund's success is contingent on its financial performance against established targets as well as the value for money it offers members. This value for money concept is equally relevant in assessing the organization's investment and benefit administration functions. The concepts of value and cost must both be clearly defined and measurable...

Institutional investing should be a “value for money” proposition for clients. This chapter provides evidence this is often not the case, with the fees and trading costs of active management reducing net returns below those of simple passive strategies. This does not mean that all active management strategies are doomed to fail. The Ontario Teacher...

The previous chapter uncovered a serious aspiration/reality gap in long-term investing. Recognizing this gap, the Focusing Capital on the Long Term (FLCT) initiative created a guide that identifies four core steps that need to be taken before genuine long-term investing can become a reality: 1. Set out the organization's investment beliefs, 2. Deve...

This chapter further develops the key features of defined-ambition (DA) pension plans in contrast to those of the still-common defined-benefit (DB) and defined-contribution (DC) models. The strengths of DA designs related to adequacy, affordability, and safety are examined in detail. Major success factors include addressing intergenerational fairne...

Pension funds face the challenge of putting investment theory into practice. This chapter examines a number of investment theories, including the efficient markets hypothesis (EMH), Brock's predictable returns thesis, Lo's adaptive markets hypothesis (AMH), Keynes' “beauty contest” analogy, Akerlof's “lemons” thesis, and Ambachtsheer's return predi...

The majority of private-sector workers in the United States, Canada, and the United Kingdom do not participate in a workplace pension plan. This leaves many facing declining living standards as they retire. This chapter examines options to materially increase workplace pension coverage in the United States at the federal (the USA Retirement Funds A...

As the meaning of fiduciary duty has evolved, pension boards have been slow to adapt. Change is even more important now, as pension funds grow and the financial markets in which they operate change. Short-term time frames, reliance on outdated investment theories, and unsustainable pension designs are all indicators that the concept of fiduciary du...

Setting pension investment programs in a long-horizon context benefits society and also helps generate strong long-term returns. The 21st century sustainability challenges make a collective shift to long-termism in investing more important than ever. However, a new global survey in which 81 pension fund CEOs responsible for managing a collective $5...

Earlier chapters noted that the possibility of outliving our pension pots is a risk we all face, and that defined-ambition/target-benefit (DA/TB) plans must deal with this reality. This chapter reminds us that while robust investment returns are helpful in making adequate pensions affordable, return expectations cannot be based on wishful thinking....

The previous chapter set out the broad ground rules for assessing whether or not a pension organization is producing value for money for its beneficiaries. This chapter explains why private markets investing is a special case deserving special attention. There are two reasons: External costs are high, and they are for the most part hidden. The fact...

Value-creating financial institutions require effective governance, a fact that has been long overlooked in the pension arena. Differences in individual decision-making styles, a lack of focus, and an overwhelming range of complex issues conspire to negatively impact the ability of pension boards to fulfill their fiduciary duties. By comparing the...

The fallout from the events of 2007?2008 has engendered several million words of criticism, constructive and otherwise. Yet, very little relevant appraisal has come from the money management industry. This chapter recommends the collective actions that can be marshaled to avoid another asset erosion. It focuses on the financial intermediation indus...

Abroad consensus exists that workplace pension arrangements around the world are sick and in need of strong medicine. Rather than resurrect the traditional defined-benefit (DB) plan or broaden defined-contribution (DC) plan coverage, this article argues that we move from an "either/or" to an "and/and" mindset to improve global workplace pension cov...

As Ontario pushes ahead with pension reform to improve retirement security for its citizens, it should consider a “middle-way” solution between current competing visions for reform, according to a report released today by the C.D. Howe institute. In “Helping Ontarians Save for Retirement: How the Province Could Adapt the Canada Supplementary Pensio...

In their 2014 article in Harvard Business Review, Dominic Barton and Mark Wiseman write that “big investors have an obligation to end the plague of short-termism.” This article supports their assertion by showing that, logically, real investing (as opposed to trading) is inherently wealth creating and long-term in nature. However, powerful short-te...

On December 14, 2011, the Wall Street Journal carried an article titled “A Manifesto for Sustainable Capitalism” by former US Vice President Al Gore and his partner at Generation Investment Management, David Blood. The article signaled the launch of their white paper on sustainable capitalism, which set out five broad recommendations. On June 4, 20...

On December 14, 2011, the Wall Street Journal carried an article titled “A Manifesto for Sustainable Capitalism” by former US Vice President Al Gore and his partner at Generation Investment Management, David Blood. The article signaled the launch of their white paper on sustainable capitalism, which set out five broad recommendations. On June 4, 20...

Accused of changing his mind, the great economist John Maynard Keynes is said to have retorted, “When the facts change, I change my mind. What do you do?” In that spirit, the articles in this issue of the Journal challenge conventional pension design and management thinking in important ways.

Traditional DB and DC pension plans have both become dysfunctional, as have attempts to “prove” that one is superior to the other. Far better that we should devote our energies to designing a new breed of pension plans, adapted to twenty-first-century realities. Such plans strike an intelligent balance between the dual goals of adequacy and afforda...

Much attention in compensation strategy is focused on the corporate sector, and on how pension funds should exercise their say on pay responsibilities as investors in that sector. In contrast, little is been written on how pension funds should pay their own people. This article draws a number of parallels between the corporate say on pay debate and...

The Canadian federal government’s Bill C-25 provides for a new type of tax sheltered savings plan for Canadians called a pooled registered pension plan (PRPP). In its current form, however, the design blueprint falls short of its primary objective: to ensure that the majority of Canadians who do not have a workplace pension will have access to a we...

A 1997 investigation into the quality of pension fund governance uncovered a wide-spread board competency problem. This follow-on study analyzes the findings of a new survey on pension fund governance, to which an international group of 88 senior pension fund executives responded. Survey responses indicate that the board competency problem has not...

Canadians successfully reformed the Canada/Quebec Pension Plans in the 1990s. Now we must do the same for the rest of our Retirement Income System. This paper offers both a vision and a plan to provide a decent post-work standard of living for the millions of Canadian workers currently accumulating insufficient retirement savings.

There is now a broad consensus that workplace pension arrangements around the world are sick and in need of strong medicine. Pension coverage and adequacy are too low, and pension uncertainty too high. The prescr iption of some pension experts is to resurrect the traditional defined-benefit (DB) plan. Others say broad defined-contribution (DC) plan...

In 1976, Peter Drucker wrote "The Unseen Revolution", a prescient book about the coming flood of retirement savings and the political, economic, and governance challenges it would create. Today, the pension revolution is unseen no longer. The $25 trillion in accumulated pension assets around the globe has become very visible, especially to the mult...

Logically, investment theory's next frontier is to put into practice the rich set of tools that academia has bestowed on the investment community - starting with Harry Markowitz's seminal article on portfolio selection in 1952. Or is it? In fact, the next frontier lies beyond simply engineering the implementation of new investment decision tools. T...

This book explores how rising pension and healthcare costs, along with workforce aging, are affecting pension and retirement planning around the world. Many middle-aged workers now realize that they will have to work longer than intended, as they begin to recognize that their retirement resources will not be inadequate to finance retirement consump...

In his testimony on Social Security System reform before Congress in 1999, Alan Greenspan voiced the opinion that it is not feasible to manage public pension funds without political interference. Poor performance is the result. This article's author beg to differ. A recent study shows no difference in the performance of large samples of U.S. public...

With global pension assets projected to reach US$12 trillion by 2000, understanding what drives pension fund performance has never been more important. The study of pension funds described in this article found that the funds, after adjustment for the incremental costs and risks they undertook, underperformed their passive policy benchmarks in the...

Despite recent advances in risk management techniques, pension funds are still struggling with the concept of risk and with the practical challenges of managing and measuring it in useful ways. This article addresses this problem by showing that pension fund managers must manage two types of risk that affect a pension fund balance sheet's funded ra...

Ottawa's proposed changes to the pension plans of MPs and federal employees are a move in the right direction. Currently before Parliament, the new provisions include increasing employee contributions to the plans and raising eligibility ages for new employees' benefits. But much remains to be done. Better funding and a more reasonable division of...