Pension Fund Excellence Creating Value for

In this book, two leading pension fund experts lay out a comprehensive plan for effective fund management. With the help of domestic and global case studies they critically assess current approaches to pension fund management and isolate what works and what doesn't.

KEITH P. AMBACHTSHEER is President of KPA Advisory Services Inc., a pension fund advisory firm based in Toronto. He writes The Ambachtsheer Letter and is the cofounder of Cost Effectiveness Measurement Inc., which monitors the organizational performance of many of the world's largest pension funds. He has contributed to numerous financial publications and is the author of Pension Funds and the Bottom Line.<br> <br> EZRA has held a number of senior positions in the United States with Frank Russell Company, a pension fund advisory firm whose clients' assets exceed $1 trillion. He is currently Director of European Consulting, based in London. He writes frequently for financial publications. His most recent book was The Struggle for Pension Wealth.

PART ONE: PENSION FUNDS AS FINANCIAL BUSINESSES: The New "Excellence" Paradigm

3

(30)

1 The Coming Era of Pension Fund Capitalism

3

(10)

Can Democratic Capitalism Deliver the Goods?

3

(1)

The Critical Role of Pension Funds

4

(1)

Coming out of the Closet

5

(1)

Creating Value for Pension Fund Stakeholders

6

(2)

On the Importance of Accountability

8

(1)

Notes

9

(4)

2 How Good Is Pension Fund Management?

13

(10)

An Anthropological View of Pension Fund Management

13

(1)

Pension Fund Managers Become Messengers Themselves

14

(1)

Measuring Pension Fund Value Production Directly

15

(2)

So What's the Problem?

17

(1)

Measuring the Impact of Organization Design Quality Directly

18

(2)

Notes

20

(3)

3 Mapping the Road to Excellence

23

(10)

Pension Funds as Financial Businesses

23

(1)

The Map

24

(2)

The Board of Governing Fiduciaries

26

(1)

Managerial and Operational Competence Matters

27

(1)

Creating Value in Pension Funds

27

(1)

Notes

28

(5)

PART TWO: WHAT EVERY PENSION FUND FIDUCIARY SHOULD KNOW...OR HAVE A VIEW ON

33

(48)

4 What Fiduciaries Should Know about Pension Law and Pension Economics

33

(20)

Seven Key Pension Economics Principles

33

(1)

Prudence Is Process

34

(2)

Know Who Your Stakeholders Are, and the True Nature of the Pension Deal

36

(3)

The Pension Fund Business and Its Investment Fundamentals

39

(10)

Define What the Creation of Investment Value Means to You

49

(1)

Notes

50

(3)

5 What Fiduciaries Should Know about Capital Markets

53

(14)

Five Key Capital Markets Principles

53

(11)

Notes

64

(3)

6 What Fiduciaries Should Know about the Investment Management Services Market

67

(14)

The Market for Investment Management Services

67

(1)

The Investment Management Industry

68

(2)

Investment Management in Traded Securities

70

(1)

Indexing

70

(3)

Alternative Assets

73

(1)

The Private Equity Market

74

(4)

Notes

78

(3)

PART THREE: MANAGING THE PENSION FUND BUSINESS

81

(76)

7 Effective Pension Fund Governance

81

(12)

The Effective Board

81

(1)

Define the Fund's Mission

82

(2)

Establish Goals and Policies

84

(2)

Establish the Fiduciary Structure and Decision Rights

86

(3)

Additional Success Factors: Trust and Character

89

(2)

Notes

91

(2)

8 The Right Funding Policy

93

(12)

What Is Funding Policy?

93

(1)

Funding Policy Issues

94

(2)

The Funding Target

96

(3)

The Pace at Which the Target Is Attained

99

(3)

Should This Be an Exceptional Year?

102

(1)

Notes

102

(3)

9 The Right Asset Allocation Policy

105

(16)

Investment Policy

105

(1)

Asset Allocation Policy

106

(1)

What System Are We Modeling?

106

(2)

What Are Our Goals and Fears?

108

(3)

How Shall We Model the Future?

111

(1)

How Shall We Make a Decision?

112

(5)

What Course Should We Follow until the Next Decision?

117

(2)

Prudence Is Process

119

(1)

Notes

119

(2)

10 Creating Value through Policy Implementation

121

(10)

Three Critical Implementation Issues

121

(1)

The Fundamental Choices

122

(1)

Active or Passive Management?

123

(1)

Internal or External Management?

124

(1)

Balanced or Specialist Mandates?

124

(1)

The Best Managing Fiduciaries in Action

125

(3)

Clear Delegation Is Most Important

128

(1)

Notes

129

(2)

11 From Data to Information to Knowledge

131

(18)

What Governing Fiduciaries Need to Know

131

(1)

Where Does Benefit Security Stand?

132

(2)

Introducing RANVA

134

(4)

Calculating Risk Charges

138

(3)

Other Representations of Return

141

(1)

Compensation

142

(1)

What Is Our Current Investment Stance?

142

(3)

Have We Been Procedurally Prudent?

145

(1)

Notes

146

(3)

12 Managing Small Pension Funds

149

(8)

What Is "Small"?

149

(1)

What Small Fund Fiduciaries Should Not Do

150

(1)

Small Funds Create Less Value

150

(1)

Back to the Basics

151

(1)

Indexing

152

(1)

Outsourcing the Managing Fiduciary Function

152

(1)

Finding a Successful Managing Fiduciary

153

(1)

Notes

154

(3)

PART FOUR: EXCELLENCE IN ACTION Four Case Studies

157

(26)

13 Excellence in Action: The Teachers' Pension Fund

157

(10)

All in a Week's Work

157

(1)

Origins of an Excellent Pension Fund

158

(1)

Teachers' Takes Off

159

(2)

Teachers' in the 1990s

161

(1)

Yes, Virginia, but Does It Work?

161

(2)

The Challenges Ahead

163

(1)

Case Commentary: What Could Go Wrong?

164

(1)

Notes

165

(2)

14 Excellence in Action: HiTechCo, Mid-West Resources Pension Fund, and the Yale University Investment Office

167

(16)

Big Picture Issues: Purpose and Mission

167

(2)

Fiduciary Roles

169

(2)

Active, Passive, Internal, External

171

(2)

Where Does Benefit Security Stand?

173

(5)

Back to Asset Allocation

178

(1)

A Taste of Yale

179

(1)

Notes

180

(3)

PART FIVE: PENSION FUNDS IN THE TWENTY-FIRST CENTURY Three Critical Issues

183

(50)

15 Defined Contribution Plans Are Different, But Are They Better?

183

(20)

The Trouble with Defined Benefit Plans

183

(2)

The Rise of Defined Contribution Plans

185

(1)

The Case of the United States

186

(4)

The Case of Australia

190

(1)

The Case of Chile

191

(2)

So Is the DC Road Better?

193

(3)

Sponsoring, Managing, and Underwriting DC Plans

196

(2)

Cash-Balance Plans: The Better Way?

198

(1)

Fully Informed Approaches to Retirement Financing Best

199

(1)

Notes

200

(3)

16 Fixing "Broke" National Pension Schemes

203

(16)

What Does "Broke" Mean?

203

(2)

How Bad Is It Really?

205

(1)

An 82 Percent Tax Rate for Future Generations?

206

(2)

Creating Futures that Work

208

(1)

Is the Prefunding of Pension Obligations Necessarily a Good Thing?

209

(2)

The Economics of Prefunding

211

(2)

Moving the Canada Pension Plan to Fuller Funding: Agreement Reached

213

(2)

Moving the U.S. Social Security System to Fuller Funding: The Debate Continues

215

(1)

Notes

216

(3)

17 Pension Funds, Politics, and Power

219

(14)

Yesterday's Pension Power Vacuum

219

(1)

Is the Pension Power Vacuum Gone Now?

220

(1)

Receding Restrictions

221

(2)

Building Fiduciary Frameworks for Pension Investing

223

(1)

The Growing Institutional Ownership of Corporate America

224

(2)

Will American Pension Funds Reunite Ownership and Control?

226

(1)

Yes, But Does It Work?

227

(1)

Pension Fund Capitalism Goes Global

228

(1)

Convergence Revisited

229

(1)

Notes

230

(3)

Index

233

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Pension Fund Excellence Creating Value for Stockholders

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