Pension design should reflect better risk management rather than avoidance of risk assets say pensions experts.
Pension reform undertakings should focus on the essentials.
London, September 22nd 2011. In the run-up to the Allianz – Oxford Pensions Conference 2011, panellists at an Allianz Global Investors roundtable on the future of pensions agree that the current risk-averse environment should provoke risk management improvement measures rather than avoidance of risk assets altogether. They also called for the regulator to focus on essential features such as scale, tax incentives, auto-enrolment, easy-to-understand default options and financial literacy for young people. In particular scale was deemed extremely important in improving efficiency of pension plans and allowing for further consolidation in sub-scale pension vehicles. Speakers included Elizabeth Corley, Chief Executive of Allianz Global Investors Europe, Gordon L. Clark, Halford Mackinder Professor of Geography at the University of Oxford, Divyesh Hindocha, Senior Partner and the Global Director of Consulting for Mercer's investment consulting business, and Jeremy Cooper, Chairman Retirement Income at Australia’s Challenger Limited.
Risk of retirement income becoming an endangered species
Elizabeth Corley commented: “Individuals’ expectations with regard to their state-sponsored pensions are shifting towards reality and we see substantial reform discussions going on throughout Europe. Retirement income will become an endangered species if we don’t have effective second and third pillar pensions.”
“The success of an appropriate pension design should be measured by investment efficiency and the comfort it gives to its active members. People want to have protection against losses and against inflation. Any solution that cannot meet these expectations would be perceived as investing in a “black box” and could lead to a further erosion of trust in the retirement system. This increasing inertia will then undermine it systematically.”
Diverse answers to financial markets challenges
Divyesh Hindocha said: "Although not universally the case, pension funds have maintained faith in growth assets but this is being tested, not only by financial markets, but also changes in the regulatory environment and prospective changes in accounting standards.”
“In some markets governance capabilities have been boosted by the injection of more "professional” trustees or in some cases investors have established a framework to outsource many of the key investment decisions. Many investors have also recognised that risk premia are time varying and the utility of risk is related to funding health and therefore dynamic. Consequently they have incorporated this by either making their asset allocation decision dependent on market and funding level, as opposed to time, and allowing their investment managers more flexibility to manage market exposures"
Flexible institutions needed to accommodate diversity of behaviour amongst people
Gordon L. Clark said: “In light of global economic turmoil and the ageing of Western societies, it is more important than ever to strike a balance between social security and workplace pensions, especially given the disconnect between how much people save and their income aspirations for retirement. With the accelerating importance of Defined Contribution pension plans, it is vital that governments, employers and the financial services industry design pension savings institutions that can ameliorate behavioural biases thus allowing people to retire with adequate funding. These institutions also need to be flexible to accommodate the diversity of behaviour amongst people so that their aspirations may not be frustrated by overly rigid government policies. Many people find long-term saving a challenge; but, some are effective savers. The challenge is to design institutions that help cater for everyone’s aspirations.”
“Risk and uncertainty challenge even the most sophisticated savers. It's not just a question of nudging people in the right direction; it's a question of designing pension institutions that can produce some certainty in outcomes and a value-for-money pension. Nudge can be a fudge if governments ignore the value-for-money proposition.”
Discussion should be focussing on outcomes
Jeremy Cooper, the central figure behind Australia’s latest “Stronger Super” pension reforms, highlighted: “Traditional legal thinking about trustees focuses too much on process and not on outcomes. Full transparency around outcomes is tantamount for a functioning retirement system.”
“Prudential safety and governance are valid matters for regulation, but so is efficiency. This has to become a trustee governance issue. The MySuper reform originated from a DC product that is simple for the members, low cost and transparent. It works for most people and sets a benchmark for other products. With certain mandatory design features and possible, but not required choices, 8 out of 10 people are now enrolled in the default option. MySuper will also require trustees offering pension products to have a strategy for dealing with the risks that face all retirees: being market risk, inflation and longevity risk. Retirees need a bedrock of secure income in retirement – immunising the gap between the first pillar and their basic spending needs; something that most DC systems do not yet deliver adequately.”
-ENDS-
Notes to the editors:
This year’s Allianz – Oxford Pensions Conference is entitled “Pension Challenges in the New Normal Risk - Investment - Design – Regulation” and takes place at Worcester College, University of Oxford, 22 - 23 September 2011. The invited international seminar is an opportunity for pension funds and their consultants, regulators and academics to convene to discuss and engage in the formulation of solutions. The seminar itself is not open to the public and will be conducted on a confidential basis. Further information is available under: http://163.1.38.99/news/events/110922/
Gordon L Clark FBA DSc is the Halford Mackinder Professor of Geography at Oxford University, holds a Professorial Fellowship at St Peter’s College, and is a Research Associate of the Oxford Institute of Ageing. He is also Sir Louis Matheson Distinguished Visiting Professor in the Faculty of Business and Economics’ Department of Accounting and Finance at Monash University (Melbourne). He has taught at Harvard, Chicago, and Carnegie Mellon universities and until recently was a Senior Research Associate at Harvard Law School. His research focuses on global finance and the governance of investment institutions such as pension funds and sovereign wealth funds as well as the nature and scope of individual retirement saving in the context of risk and uncertainty. Published books include the forthcoming Saving for Retirement (Oxford University Press 2012) (with Kendra Strauss and Janelle Knox-Hayes) and Sovereign Wealth Funds (Princeton University Press 2012) (with Ashby Monk), the co-edited Managing Financial Risk (OUP 2009) (with Ashby Monk and Adam Dixon), The Geography of Finance (OUP 2007) (with Dariusz Wójcik), European Pensions & Global Finance (OUP 2003), Pension Fund Capitalism (OUP 2000), and the co-edited Oxford Handbook of Pensions and Retirement Income (OUP 2006). At Oxford, he serves as a trustee of the Oxford Staff Pension Scheme and is an elected member of the University Socially Responsible Investment Review Committee.
Jeremy Cooper is Chairman, Retirement Income at Challenger Limited, Australia’s leading provider of annuities and retirement income solutions. Prior to joining Challenger, Jeremy was appointed by the Australian Government to chair a wide-ranging review of Australia’s superannuation (pension) system, now known as the ‘Cooper Review’. His panel’s report was finalised on 30 June 2010 and has since been substantially adopted by the Australian Government in its proposed ‘Stronger Super’ reforms: http://strongersuper.treasury.gov.au.
Before his review role, Jeremy was deputy chairman of Australia’s corporate, financial services and markets regulator: the Australian Securities and Investments Commission (ASIC) for five years from mid-2004. Prior to his term at ASIC, Jeremy was a partner of Australian law firm, Blake Dawson, where he practised principally in mergers and acquisitions and corporate advice for nearly 20 years. Jeremy was recently awarded the 2011 Libby Slater Award by the International Pension & Employee Benefits Lawyers Association in Berlin for his contribution to the Australian pension system.
Elizabeth Corley is Chief Executive Officer of Allianz Global Investors Europe Holding GmbH and designate CEO of Allianz Global Investors with effect from 1 January 2012. She joined the company in April 2005 and in October 2005 became a member of the Management Board of Allianz Global Investors AG, the global management holding company of Allianz’s asset management business. Prior to joining Allianz, Elizabeth spent eleven years working at Merrill Lynch Investment Managers (formerly Mercury Asset Management). She became Managing Director and Head of the EMEA Asia Pacific Mutual Fund Business. Before this, Elizabeth was a partner with Coopers & Lybrand. In 2006 and 2007, she was Chairwoman of FEAM (Forum of European Asset Managers); in September 2010 she was appointed Chairwoman for a second term. Elizabeth is also a board member of TheCityUK Ltd and a member of the City of London International Regulatory Strategy Group. In April 2011 she took up the position of non executive director on the Financial Reporting Council, the UK’s independent regulator responsible for promoting high quality corporate governance and reporting to foster investment.
Divyesh Hindocha is a Senior Partner and the Global Director of Consulting for Mercer's investment consulting business. In this capacity, his role is to ensure that Mercer deliver relevant and appropriate advice to clients. This involves identifying the key long term issues relevant for institutional investors and driving forward Mercer’s thinking in these areas.
Divyesh provides investment advice to clients across Europe and the Middle East. He is a member of Mercer’s Global Business Leadership Group.
Divyesh has been with Mercer since 1989. Before joining the investment consulting business in 1993, he was a part of Mercer's Risk, Finance and Insurance group.
Divyesh has a bachelor’s degree in mathematics from the University of Warwick and is a Fellow of the Institute of Actuaries in the United Kingdom.
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