Practical analysis for investment professionals
14 May 2016

A New Model for Pension Management

Keith P. Ambachtsheer


Keith P. Ambachtsheer, long an outspoken advocate for pension reform, shared his latest prescription for change with delegates gathered in Montréal for the 69th CFA Institute Annual Conference.

Referencing his latest book, The Future of Pension Management, Ambachtsheer, who is the founder and director emeritus of the International Centre for Pension Management (ICPM) at the University of Toronto’s Rotman School of Management, gave a sober assessment of the state of the world’s workplace retirement plans, praising the relative strength of plans in northern Europe while declaring those in southern Europe to be a “disaster.” He called for action on three fronts: pension design, governance, and investing. In each case, he posited that the solution was not an “either/or” proposition but one that incorporated ideas from both sides of the debate.

  • Pension design: The greatest challenges facing pension design include sustainability, coverage and adequacy, and poor cost effectiveness. Affordability is pitted against payment safety. In response, Ambachtsheer said the industry needs to move beyond the traditional defined benefit (DB) versus defined contribution (DC) dilemma. The most effective plans incorporate elements of both and are best represented by the Tinbergen defined-ambition/target-benefit (DA/TB) pension model. The model’s namesake, Jan Tinbergen, was the first Nobel laureate in economics. As applied, Tinbergen’s work addressed the affordability versus safety dilemma in pension design by requiring a hybrid: an affordable “long-horizon, wealth-creation investment program” combined with a “shorter-horizon, payments-for-life annuity program.”
  • Pension governance: Drawing on the work of Peter Drucker, the “founder of modern management theory,” Ambachtsheer cited poor board-selection processes, a propensity to micromanage, and ineffective organization design and incentive structures as just some of the obstacles to good pension governance. Ambachtsheer posited that when it comes to board composition, a combination of laypeople and professionals provides balance, legitimacy, and trust and allows for a more collaborative culture. And to maintain their effectiveness, more rigorous self-evaluation and education processes are necessary.
  • Pension investing: According to Ambachtsheer, pension investing has been hampered by gaps between investment beliefs and their implementation and how investment performance and risk is measured and managed. He again pointed to the Tinbergen DA/TB pension model as the remedy to what ails pension investing and cited the work of economist John Maynard Keynes as especially influential, declaring chapter 12 of Keynes’s The General Theory of Employment, Interest and Money to be without equal as an investment thesis. Ambachtsheer shares Keynes’s focus on long-termism, noting that quarterly returns are “irrelevant” and suggesting that “buying and nurturing cash flows at reasonable prices” is the most promising path to success.

Ambachtsheer closed with a quote from Irish playwright George Bernard Shaw’s Man and Superman:

“The reasonable man adapts himself to the world; the unreasonable one persists in trying to adapt the world to himself. Therefore all progress depends on the unreasonable man.”

Ambachtsheer shared that Tinbergen, Drucker, and Keynes were among several “unreasonable” greats in finance whose work inspired his own.

This article originally appeared on the 69th CFA Institute Annual Conference blog.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Photo courtesy of W. Scott Mitchell


Key Takeaways

  1. To overcome the many challenges facing pensions, the most effective plans will incorporate elements of both defined benefit and defined contribution pension models.
  2. Good pension governance requires a board composed of laypeople and professionals, which provides balance, legitimacy, and trust, and allows for a more collaborative culture.
  3. A focus on long-termism and a commitment to “buying and nurturing cash flows at reasonable prices” are among the keys to investing success for pensions.


The Future of Pension Management
Keith P. Ambachtsheer

View the full transcript (PDF).

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About the Author(s)
David Larrabee, CFA

David Larrabee, CFA, was director of member and corporate products at CFA Institute and served as the subject matter expert in portfolio management and equity investments. Previously, he spent two decades in the asset management industry as a portfolio manager and analyst. He holds a BA in economics from Colgate University and an MBA in finance from Fordham University. Topical Expertise: Equity Investments · Portfolio Management

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