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“Best Practice Topics” Pension Management Michael J. Spendolini. Ph.D. President, MJS Associates.

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Presentation on theme: "“Best Practice Topics” Pension Management Michael J. Spendolini. Ph.D. President, MJS Associates."— Presentation transcript:

1 “Best Practice Topics” Pension Management Michael J. Spendolini. Ph.D. President, MJS Associates

2 MJS Associates / AdEPP2 “Best Practice” Issue Identification  Objectives  Identify common topics of interest across the EC countries (and beyond)  Find a consensus of opinion regarding these common issues  Identify “best practice” trends when possible  Research  Input from topic experts (associations, institutes, academics, consultants, publication editors)  Question: “Identify one or two topics that are universal and are the subject of “best practice” inquiry”.

3 MJS Associates / AdEPP3 “Expert” Resources  PMI: Pension Management Institute  IPE: Investment and Pensions Europe  EFRP: European Federation for Retirement Provision  CEPS: Center for European Policy Studies  Mefop: Italian Pensions Association  EPN: European Pensions and Investment News  CEPR: Center for Economic Policy Research  B&W Deloitte  Financial Times  National Association of Pension Funds (UK)  The World Bank (Washington)

4 MJS Associates / AdEPP4 Benchmarking Opportunities, Not Results  Astounding lack of information sharing and networking at all levels: industry, country, EU, Global participation  Very few valid “process” benchmarking studies completed, most resemble traditional comparative/competitive analysis  “Fractioned” and competitive nature of marketplace inhibit aggressive benchmarking  National and EU government initiatives are beginning to take shape  Many are now calling for increased information sharing and initiation of true “process” and technology benchmarking

5 MJS Associates / AdEPP5 Topics of Interest: 2004  Diversification of investment options  Emerging role of investment consultants  Pan-European investment issues  The role of pension boards and trustees  The role of politicians  Need to improve customer focus and communication  The challenge of developing meaningful benchmark data  Social responsibility impact on investment strategy  I.T. solutions in support of pension/investment management  Impact of IFRS / IAS19

6 MJS Associates / AdEPP6 Diversification of Investment Options  “Would these (e.g. AdEPP) funds…..based on a pay-as- you-go-basis….whose members rank among Italy’s best paid white collar workers, have prospered better if they were established as proper pension funds, with investment freedom since the 1960s and a stronger actuarial connection between contributions, income, and benefits?”  EPN Magazine 2004 “Full Investment Freedom?”

7 MJS Associates / AdEPP7 Diversification of Investment Options  Hot asset classes: hedge funds, private equity, property, currencies, emerging markets, small cap  Hottest class: hedge funds 2003: global return 13% (steady for 2004) Estimates close to $1 Trillion invested (still <1%) European institutions investing some portion of portfolio in hedge funds will rise from 21% in 2003 to 50% in 2005 New S&P European-based service for “funds of hedge funds”  In Italy, successful move to Multicomparto reflects trend toward greater diversification interest

8 MJS Associates / AdEPP8 Emerging Role of Consultants  Strong role as fund “monitors” to keep watch over pension fund managers (e.g., risk assessment and performance evaluation)  Supplement with in-house software – e.g., Deutsche Bank’s WM Company and Euraplan  Other key roles, legal counsel, IFRS/IAS19 implementation, risk management  Challenge: consultant contracts tend to be long-standing and based on trust rather than formal performance assessment  Micro: employees seeking help in deciding what type of fund to sign up for may seek out independent advisors or company may provide help  Macro: some resistance to fee structure based on higher international consultant fees and traditional payment on project basis  Challenge: strained relations between trustees, fund managers, and consultants following losses

9 MJS Associates / AdEPP9 Pan-European Investment Issues  “It is clear that a single strategy for saving and investment products in Europe is neither feasible nor appropriate in the current demand climate.” – B&W Deloitte  “The European Commission seeks to introduce a coordinated approach to the diversity of member states which govern non-State pension provision. It is not attempting harmonization. It seeks the elimination of unduly restrictive or discriminatory tax regulations while safeguarding the tax revenues of member states.” – European Commission  “The central claim is that the Notional Defined Contribution (NDC) system is an ideal approach to deal with diverse fiscal and social reform needs, and to introduce a harmonized structure while allowing for country-specific preferences with regard to coverage and contribution rate” - World Bank

10 MJS Associates / AdEPP10 Pan-European Investment Issues  Need to understand “best practices” and documented results in key areas in relation to EU “Pension fund Directive 2003/41, particularly as they might impact multinationals Models for improved corporate governance and improved risk management Cost savings: economies of scale, administration efficiencies, negotiation of lower charges from service providers Increased opportunities for change, help corporate restructuring as EU enlarges, standardizing retirement benefits across business units.  Key challenges National differences in financing regulations, retirement ages, vesting Taxation: the conditions under which contributions, investment income, capital are taxed or exempted and conditions for deducting contributions for tax purposes.

11 MJS Associates / AdEPP11 The Role of Pension Boards and Trustees  “Pension funding and investment strategy decisions are too important, in the present economic climate, to leave entirely to trustees and pension boards. We find that they actually welcome a strong “steer” from the scheme sponsor on these difficult issues” – Hewitt Associates  “New legislation will require new levels of competency. Should trustees be regarded in the same light as non-executive directors? If not, why not? If yes, should they be paid accordingly?” - Financial Times  Challenge: to develop a well-defined job market for trustees  Need to develop and evaluate training and development resources for trustees “ ….that pension fund trustees often lack the resources and expertise to make informed judgments; as a result trustees often rely on investment consultants. Yet they often lack specialist skills and rarely have their performance assessed or measured”. - Myners Report (UK)

12 MJS Associates / AdEPP12 The Role of Politicians  Best practices for improving communications between pension fund industry and politicians a high priority “You have to inform them, brief them, teach them. If you don’t, you’re a sitting duck for them” - Karel Stroobants (former head of Belgian Pension Fund Association) “I’m always struck by the gap between what politicians say in terms of supporting, and perhaps even needing, a strong private sector of pensions provision and how difficult they make it for that to happen”. --- - Eric Lambert (Head of Performance Consultancy, WM Co.) “Politicians of all parties are bad for pension funds. I think that the need to look forward is very difficult for them” – Adrian Cunningham (Co. Secretary ASBL-MEP European Parliament pension scheme) 78% of pension fund managers identify politicians/regulators as the biggest threat to pension funds – IPE Survey, 2004

13 MJS Associates / AdEPP13 Need to Improve customer focus and communication  Specifically improved communication from pension fund manager with plan members (good and bad news)  Improved methods of measuring and acting upon customer satisfaction data.  Emerging role of Manager of “Stakeholder Relations” with focus on key customer segments  Proactively communicate details of investment plans and strategies. Educate the customers and stakeholders.

14 MJS Associates / AdEPP14 Customer Communication  Poor communications patterns represent a major exposure in these changing times: “Commerzbank sent shockwaves across German labor markets when it announced that it was canceling the agreement over company pensions. The move unleashed protests from workers, and the bank’s public image suffered. During the process of change, Commerzbank admits that mistakes were made in the way the whole thing was handled. “The problem was that we did it very badly…..informing the staff but not telling the works council. We misjudged it” -Peter Pietsch of Commerzbank as reported by IPE

15 MJS Associates / AdEPP15 Challenge of Developing Meaningful Benchmark Data  Some weaknesses noted with assumptions behind typical ALM approach to producing benchmarks (e.g., breakdown in the equity-bond correlation)  Interest in “Liability-driven” benchmarks (more risk averse and takes cash flow matching or some variation as a starting point).  Innovative approaches that replace the traditional benchmark index by a simulation process (randomly generate a large number of portfolios and measure performance of each. Manager then assessed according to some performance level - e.g., percentile in relation to the distribution)  Analysis of benchmarking that focuses more on longer term performance indicators as opposed to pressures of quarterly performance cycle. Dilemma for trustees….how to exercise due diligence responsibilities yet encourage managers to focus on the longer term.

16 MJS Associates / AdEPP16 Challenge of Developing Meaningful Benchmark Data  Recent examples of Benchmark citations re: Venture Capital Cambridge Associates LLC European Venture Capital Index British Venture Capital Association and European VCA data (using Venture Economics European data) Mefop and Russell/Mellon attempt for Italian pension fund market  Problems with proper benchmarks for private equity Funds not required to publish information other than to investors; hard to get hold of data on reliable basis Data from fund managers easy to manipulate – concern for quality  Pressure building for greater transparency of fund performance In U.S. Freedom of Information Act to force funds disclosure In Europe, more problematic, e.g., interim asset valuation by general partners

17 MJS Associates / AdEPP17 Social Responsibility impact  SRI mutual fund market continues to grow in Europe – more than 220 SRI funds available (Italy 2 nd largest market @2.3 b Euro)  Proof of a growing and robust SRI index industry in Europe  European Commission 2001 green paper acknowledges the need to maintain a “level playing field” in the context of social responsibility.  UK: 82% of fund managers believe that environmental management linked with growth in market value of companies  Belgian Parliament: mandate pension fund annual report including social, ethical, and environmental aspects  France: Code monetaire et financier – investment managers must consider social, environmental, and ethical factors….  Germany: German Parliament established an ethical, environmental, and social disclosure regulation in the German pensions law.  Sweden: 5 largest state-controlled pensions must include environment and ethics in their investment policy

18 MJS Associates / AdEPP18 I.T. Solutions  General Goal: Early adopters of pension administration technology want to implement a common IT platform across European sites. There is a need for tools capable of handling all of the rules and processes of each national market.  Main tasks/topics: scheme administration, mutual fund shareholding, proprietary links for execution of trades, deposit reconciliation, integrated imaging and workflow, commission calculations, annuity and installment payouts, loan processing, tax reporting, and management reporting  Vendors offering ASP (Application Service Provider) models that sell software through remote delivery methods – pension scheme provider can “dial in” to the scheme through the internet. Hopefully eliminate IT development and maintenance for pension scheme provider, while maintaining control of operations. Cost effective especially for smaller providers.

19 MJS Associates / AdEPP19 I.T. Technologies  Main focus areas for technology development and application: integrated voice response systems incorporating speech recognition technology Browser-based call center solutions Participant financial education (integrated)  Important for each product to contain proprietary scripting tools that allow internal customization without the need for additional code. This will support more easily defining plan business rules, incorporating site-controlled tables or algorithms, and enabling local language screens.

20 MJS Associates / AdEPP20 Impact of IFRS and IAS19  How best to implement process changes driven by IFRS : Approaches to P&L, budgeting, forecasting, management reporting Govern use of financial instruments such as hedge funds and leasing Affects on corporate governance Challenge ability to disseminate knowledge/information to stakeholders and financial community  For IAS19, 2 topics hold interest as “conversion” issues The valuation of assets based on market values (Fair value accounting) Dealing with increased pressure to minimize under-funding, while insuring long-term continuity of the fund.

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