The Canadian Source Of Employee Pension Fund Investment And Benefits Plan Management

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Benefits and Pensions Monitor April 2007

A Conversation With… Keith Ambachtsheer

To mark its 15th year of publishing, Benefits and Pensions Monitor will run a series of conversations with some people who have made a difference in the industry.

Obviously, not just for his newest book, but for his outspoken comments about pensions and pension investments for more than three decades, it was decided that Keith Ambachtsheer was an ideal candidate to lead this series off.

The following is an edited version of the conversation between Ambachtsheer and Benefits and Pensions Monitor Executive Editor Joe Hornyak.

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BPM: Where did your passion for pension plans and pension plan investment come from?

Keith Ambachtsheer: It depends on how far back you want to roll back the clock. I went to RMC (Royal Military College) and I did my time in the Canadian forces, but the area that was most interesting to me as a long-term pursuit was economics. Once my time in the military was up, I earned a Masters degree from Western and then went into the PhD program at McGill University where I kind of hit the wall.

I realized if you hang around academia long enough, the question becomes how long do you want to do that?

Then, in 1969, a friend of mine, Bob Swan who I went through Western with, said “if you donʼt want to finish the PhD thing, come and work for us in the investment department at Sun Life.”

So I get this amazing first job, which was, at that time, stuff like portfolio theory and capital markets theory … all these things were so new that they had just barely started to hit the professional community. My job was to go and find out who people like Harry Markowitz, Bill Sharpe, and Myron Scholes – this gang of academics – were, what they were talking about, and whether it had any relevance to the real world.

So I spent three years at Sun Life doing that and learning how a real live investment department works. Sun Life, even in 1969, had everything. They had real estate, stocks, bonds, and currencies. So it was one foot in the real world and the other foot in academia.

From there, Brendan Calder got me involved in Canavest House, an institutional brokerage firm. I was there for nine years and we basically developed a consulting practice working with money managers to apply portfolio theory.

At some point, I started looking at the broader question of whose money is this? At that time, in the 1970s, the funding started to seriously happen in the pension plans. This was a time when all the investment counselors started up. Firms like Jarislowsky Fraser and Beutel Goodman were gathering in the assets under management just by being around.

The career choice was ʻdo I go and join them or do I do something else?ʼ The something else was actually influenced by an actuary I met at the time,

Don Ezra. Don and I teamed with Bob Mitchell and founded PFA (Pension Finance Associates) in 1981. The idea behind PFA was to apply financial economics and up-to-date actuarial techniques to managing pension plans. It basically looked at the broader questions – whose money is this; what does the balance sheet look like; is it being valued properly; and how should you make risk-related decisions in that context – into the more integrated context of looking at the whole thing?

Another influence was the intellectual background at that time.

Peter Drucker wrote this book in 1976 called The Unseen Revolution: How Pension Fund Socialism Came to America, and it basically laid out for me what youʼd call the political economy of pensions as to where does it fit in the rest of the world, whatʼs the ideal fit, how close to that are we, and, if weʼre not there, how do we get there?

Thatʼs something that Iʼve kind of plugged away at ever since.

BPM: What do you think the key points of your new book, ʻPension Revolution: A Solution to the Pensions Crisisʼ are? What do you want readers to come away with?

KA: The message is really one thatʼs the same that Drucker put forth – weʼre not going to get better outcomes unless we apply integrative thinking to this area. Itʼs not just about actuarial science. Itʼs not just about investments. Itʼs not just about one thing.

Itʼs about integrating some elements in relation to public policy – like what are we trying to do here anyway – to looking at labour markets and seeing how they work (or donʼt work), to looking at the concept of occupational pension plan coverage as a really powerful way of smoothing lifetime consumption for a lot of people, but, also, in a positive way, tying them to economic wealth creation.

But unless you actually have dedicated, expert, armʼs length, pension delivery organizations that have scale, you arenʼt going to get there. It requires a number of things fitting together to really move us to the next plateau. Thatʼs the key message of the book.

BPM: Why donʼt we get it in Canada?

KA: Well, Iʼm not sure that there is any one single answer.

What we can say is given that politicians are pretty good at listening to what they think will get them elected, one of the realities is that in Canada, pension reform just hasnʼt got to that absolute political mustdo level. Thatʼs one reason.

Another reason is it is hard for them to put themselves in somebody elseʼs shoes where that safety net doesnʼt exist. Iʼve talked to David Dodge, governor of the Bank of Canada about this – heʼs sort of hammering away that everybody should have a DB plan. I told him, ʻDavid, thatʼs easy for you to say. The Bank of Canada has a really great DB plan. Its chance of default, pretty low. Are they going to get a final earnings based fully indexed pension? You bet they are.ʼ

Itʼs the same for the rest of the public service sector. If, somehow, the people who could make the policy changes didnʼt have pension plans that were solid, then youʼd get more empathy for the other side.

Having said that, I had a chance to respond to The Canadian Federation of Independent Business report ʻCanadaʼs Pension Predicament. ʼ It was lamenting that ʻhere, the public service has these gold-plated plans and we, in the private sector, especially the small business end of the private sector, have this mish-mash.ʼ My response was that ʻyou can lament a little bit that maybe the accounting isnʼt what it should be in the public sector in terms of costing, but at the end of the day, you have 100,000 members, do something!ʼ

I havenʼt heard back yet.

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