Every great thinker has their own hero. For Keith Ambachtsheer, one of the most influential pension advisers in the world, it is management consultant Peter Drucker.
In 1976, Drucker wrote a book, called ‘The Unseen Revolution’, which Ambachtsheer, who is founder of KPA Advisory Services, says has not been read nearly as much as it should be.
Although Drucker speaks at length in his book about how the pension system has created an unusual situation where the public has become the owner of vast swaths of corporate America, Ambachtsheer is mainly charmed by Drucker’s prediction of the future pressures that the baby-boomer generation will have on pensions systems worldwide, but above all by his down-to-earth assessment that a pension fund’s main job is to provide value for money.
Now, almost 40 years after the book appeared, it still has a strong influence on Ambachtsheer and Drucker’s ideas are recognisable in Ambachtsheer’s new book: ‘The Future of Pension Management’.
“At a very high level, all Drucker said was that pension organisations are not excepted from the responsibility of creating value for money,” he says in an interview with [i3] Insights.
“If you take that as an assertion and you follow through on what that means for governance, how you define investment programs and how you measure value for money, it all logically follows,” He says.
One of the conclusions of this model, in Ambachtsheer’s interpretation, is that bringing asset management in-house is desirable as it enables a fund to get better value for money.
It was probably the most brilliant move made in pensiondom anywhere, because it is a wonderful large real estate company. It is thinking outside the box and realising that they had a board that would consider the unconventional as long as it made logical sense.
“If you look at the broader perspective, it is interesting to watch an organisation like Ontario Teachers’ Pension Plan, which was an absolute green field organisation when it started in 1991. They were a government bureaucracy with CAN$ 20 billion in unmarketable government debentures and then they basically adopted the Drucker model and all that it entails.
“So when you follow the logic of what does an organisation do when it’s got the right kind of board and the right kind of management and they can hire the right kind of people, how does that evolve over time?
“Well, what we’ve discovered by observing that kind of organisation is that you insource early, you pay for talent internally and you recognise that when you become an active owner of a bunch of businesses, you’d better have some people inside your own shop who are comfortable running businesses themselves and evaluating well how other people run businesses,” he says.
This also allows a fund to shape its own destiny to some degree, as it has more flexibility to undertake new ventures.
“You can do all kinds of whacky things that actually are very smart, but that are unconventional,” Ambachtsheer says.
“When Ontario Teachers’ realised not very long after the start that they wanted to be in real estate, the conventional approach would be to talk to a bunch of real estate fund managers. They did some of that but they didn’t like the fees and they ended up taking Canada’s largest publicly traded real estate company private and it is still their wholly-owned subsidiary 20 years later.
Ontario Teachers’ bought Cadillac Fairview in 2000 and it was the first Canadian pension plan to pull off such a transaction.
“It was probably the most brilliant move made in pensiondom anywhere, because it is a wonderful large real estate company. It is thinking outside the box and realising that they had a board that would consider the unconventional as long as it made logical sense.”
“When you do that, you learn that once you get to a certain scale, the simple economics of insourcing versus outsourcing is just compelling. Just do the math.
“If you have $10 billion in private assets and you are going to outsource you’d pay 5 per cent by the time you count all the pieces, so $500 million a year. Well, you can hire a hundred investment professionals at $1 million a year each. Then I’m still only spending $100 million a year. That is 20 per cent of the cost of outsourcing.
“So the economics are completely compelling, but you have to have a culture that allows you to hire talent.
“Yes, they are people in high income brackets, but that is just the way it is. It makes much more sense to get those people on board in our own shop than to go out and hire them at their own prices in the third party market,” he says.
Asked if this would lead to any cultural problems, as many other staff within the pension organisation would not earn nearly as much, Ambachtsheer refers to a conversation he had with Ontario Teachers’ founding Chief Executive Officer, Claude Lamoureux.
“As part of our board effectiveness program, I had a conversation with Claude and he was asked the question of how do you run an organisation where on one floor you potentially pay a bunch of people CAN$ 1 million plus and you’ve got another floor where people are pension administrators and that is a completely different labour market. The going wage might be $60,000 – $70,000 a year. How does that work?
“Claude said that it was no problem. He said: ‘I get people to talk to each other and to appreciate that different jobs are different labour markets, that we are a team who needs to work together and it has never been an issue at Ontario Teachers.’
“The other question is: ‘What about teachers? How do they feel having their pension managed by people that make $1 million a year?’ Well, it is again about messaging that you can run a better pension at a lower cost and now 25 years later it is not only true in theory, but also true in fact.”
“It is about being fully transparent and telling it the way it was,” he says.
Independence is the Wrong Term
Drucker’s ideas about the role of pension funds has also laid the foundations for Ambachtsheer’s views on governance and he is adamant that board members and trustees should have relevant expertise and a sense of public duty.
He is less convinced about the need for independence, a point he makes clearly in his new book.
“I actually think that independence is the wrong term,” he says.
“To me, the two dimensions that you want both of is: one, fiduciary duty – a notion of public service legitimacy representativeness, so that people really feel that this board is looking after our interests.
“But the other dimension is that these organisations are relatively complex financial institutions and what a board is supposed to do is question management about the strategic plan: ‘Why is this a good idea? Tell me more’.
“That requires a background in business acumen and a background in various areas. There is an audit dimension, there is strategic management, an HR dimension, an investment dimension and not everyone is going to have all of those background, but collectively they do.
“In the book, I go on about stop arguing about lay boards, professionals boards or independent boards versus non-independent boards, but to recognise what you want in the ideal board is that there is a sense of public duty, but also that there is a collective skills experience to allow them to be an effective board.
“You want both!”
Keith Ambachtsheer’s new book: ‘The Future of Pension Management’ is published by Wiley Finance. ISBN-13: 978-1119191032
[i3] Insights is the official educational bulletin of the Investment Innovation Institute [i3]. It covers major trends and innovations in institutional investing, providing independent and thought-provoking content about pension funds, insurance companies and sovereign wealth funds across the globe.