Sir Richard Shirreff (Partner and Co Founder of Strategia Worldwide), Pascal Hogenboom (Partner at Avida International and Strategia Worldwide) and Paul Boerboom (Founding Partner of Avida International) consider what investors and pension funds can learn from the military’s approach to risk and crisis management in the October 2019 issue of Pensions Aspects.
Simone Lavelle attends Morgan Stanley’s ‘Born to be active: adding value through skill, conviction and engagement’
On 26 September 2019, Simone Lavelle attended this event in Amsterdam.
Dorothee Franzen attends Fachtagung Aufsichtsrecht für EbAV and Tagung der Fachvereinigung Pensionkassen
11-12 June 2019 – Sally Bridgeland was one of the speakers in Plenary 5 on 12 June – “Larry Fink, CEO, Blackrock, said: “We are going to see evidence over the long term that sustainable investing is going to be at least equivalent to core investments. I believe personally it will be higher.” So, is responsible investment now core to running pensions and institutional capital? If so, how? And why aren’t more pension funds and investment managers doing it?”
7-8 May 2019 – Dorothee Franzen attended the annual meeting of the German pension fund association aba Jahrestagung in Bonn.
Professor Christian Schmitt joining Avida International as Senior Adviser was given attention in a press release:
This was covered in:
26 March 2019 – Everyone understands the importance of good risk management, including the regulator. Developing risk assessments, having a solid risk policy and a governance framework around risk management are crucial for good member outcomes. But how does a pension fund attract top risk managers? Avida has frequently been asked these questions by our pension fund clients. Until now we never had an adequate answer. We now think that pooling risk management resources with other pension funds may be the way forward for those funds not able to employ a full-time chief risk officer. At this breakfast roundtable our specialists explored the pros and cons of sharing risk management resources with fellow pension funds and led a roundtable discussion. If you are a senior pension fund representative interested in attending our roundtables in future please contact firstname.lastname@example.org.
7 March 2019 – Dorothee Franzen attended this invitation-only event in Berlin-Mitte organised by the Eberbacher-Kreis.
6-8 March 2019 – Sarah Smart participated in the DC stream on ‘Passive v active investing for DC investors’ on 7 March.
Simone Lavelle attends Mallowstreet University Dinner – Pioneers in sustainable investing: integrating the UN sustainable development goals into investment
9 November 2018 – Simone Lavelle attended this roundtable.
31 October 2018 – Bart Heenk and Simone Lavelle attended this reception in London.
This blog, by Bart Heenk, was first published on Mallowstreet.
If there is one thing pension funds can learn from the military it is that it is not the plan that matters and planning is everything. The army spends 80% of its time training and 20% in operations. This allows them to prevent crises before they become reality. Military planning is used to build agility in dealing with risks and war gaming is essential to build intellectual ‘memory muscle’. Pension funds can learn from this.
The financial crisis of 2008 has shown that all major risks were interrelated and most of us were ill-prepared and some took precisely the wrong decisions by panic selling in the depths of the crisis or halting rebalancing trades. When long-term capital market assumptions are based on long-term mean reversion of markets, one very bad decision in a crisis can have a substantial impact on these assumptions, to the extent of rendering them worthless. So, have we learnt our lessons from the financial crisis and are we better prepared now?
At a recent roundtable jointly organised by Strategia Worldwide1 and Avida International, senior pension fund executives and trustees discussed their biggest risks and how prepared they were for dealing with those risks. Risks mentioned ranged from cyber-crime and the associated reputational damage and inability to pay out pensions, to insufficient liquidity in the fund to simultaneously meet margin calls from derivatives counterparties and transfer requests related to pension freedoms following market turmoil.
Whilst most pension funds around the table admitted that they had done very little planning, some of the participants had run war gaming sessions in order to prepare the organisation for crises. They learnt not to focus on procedures or a manual (a plan) but on process (the planning). This is precisely what the military does. War gaming is essential to build the intellectual memory muscle to be ready in times of crises. One thing is certain: no plan survives first enemy contact. Or, in our pension fund language, a crisis is never exactly how it was anticipated. Consequently the value of war gaming is not in producing a plan but in the planning process itself. When a crisis hits, the organisation will have practiced so much that crucial issues like command structure, team composition and relationships, everyone’s roles and stakeholder communication have become second nature. This allows the organisation to focus on the essentials in a crisis, and act quickly and decisively. War gaming also has preventative benefits and can help identify those risks that can be mitigated already.
Interestingly, whilst this is something that is commonly practiced by corporates in, for example, the airline, petrochemical and extraction industries, their pension funds tend to be much less well prepared for crises. The financial crisis of 2008 was a fantastically valuable learning opportunity but unfortunately many trustee boards have largely forgotten the lessons partly as a result of changes in the composition of the board. Quite a few pension funds will have a crisis plan but if it is not regularly practiced these plans will prove to be of little value when a real crisis happens.
Strategia and Avida want to help pension funds to become better prepared for crises and are thinking of putting together a joint service proposition that entails war gaming sessions once or twice yearly, plus a SWAT team that is on standby for when the pension fund needs extra resources to deal with an eventuality. The idea being that most pension funds are resource constrained and do not have sufficient capacity to deal with an out of the ordinary situation.
This initiative will hopefully help pension funds to learn some very valuable lessons and prepare them better for the next crisis that will undoubtedly hit us one day.
1 Strategia Worldwide helps companies, investors and funds across many sectors protect value by taking a comprehensive approach to risk and then designing integrated strategies to manage them.
9 October 2018 – Simone Lavelle attended this conference.
25 September 2018 – this roundtable was organised together with Strategia Worldwide. Sir Richard Shirreff introduced the subject and discussed the importance of proper planning for crises. This was followed by a roundtable discussion. If you are a senior pension fund director/trustee interested in attending our roundtables, please contact email@example.com.
10 July 2018 – Simone Lavelle attended this State Street event.
3 July 2018 – Simone Lavelle attended the Rabobank event.
This blog, by Bart Heenk, was first published on Mallowstreet.
Investment decision making is difficult for even the most specialist investment managers. And they have clear and unambiguous benchmarks to measure the success of their decision-making against. They also have frequent, accurate and to the point information on how well they are doing versus their benchmarks.
Investment decision-making for trustee boards is even harder. Often their benchmarks are a combination of various – even conflicting – objectives. Closing the funding gap whilst keeping downside risk limited is one. Maximising sponsor contributions whilst keeping the covenant strong is another.
Don’t rely on reporting
To make matters worse, reporting is often incomplete, inconsistent and sometimes even inaccurate. There are various reasons for this: pension funds often get their reporting from external service suppliers, such as the actuary, custodian, investment adviser or fiduciary manager. These suppliers report on the specific service they provide, leaving the pension fund to put the pieces of the puzzle together.
But the suppliers may use different assumptions, different calculations and different source data. This can make putting the puzzle together an almost impossible task. The result is that pension funds spend more time on reconciling data than on analysing the information.
Some service providers, like fiduciary managers, offer to put the pieces of the puzzle together for the pension fund. This is helpful, but not a solution given the need to have information independently verified, particularly data coming from providers who have a commercial interest in presenting their data positively.
So how is a pension fund board to make investment decisions in these circumstances?
All participants in a recent roundtable organsied by Avida agreed on the need to take reporting back to the pension fund’s objectives. If the pension fund’s board has delegated investment decision-making within certain restrictions (whether risk-related or otherwise) to an investment committee, this means different reports should go to the IC and to the board, because the objectives of the IC and board will differ.
If the pension fund has an internal CIO to whom the IC has delegated some decision-making, it again calls for dedicated reporting for the CIO. Whilst this puts a burden on the infrastructure needed to produce all these reports, it is seen as essential to report back to each governance layer’s objectives.
See the bigger picture
The challenge is to restrict reporting to what is essential for board and committees, and this is where most pension funds have work to do. The more detailed the reporting, the more likely it is that the discussion is going to focus on the detail rather than the big picture. This is not a good use of the board’s time, whose focus should be on the big strategic issues.
Good reporting is also about finding the right balance between backward-looking and forward-looking information.
Backward-looking information is important to learn how previous decisions have impacted the financials; this includes the often overlooked need to assess what the impact of not taking decisions has been. Backward-looking information also helps with assessing how well your assumptions have worked out (eg, ‘Did interest rates rise as much as we expected them to?’).
Humility is healthy
Board members are often successful business people and they can have a tendency to become overconfident about their ability to predict where markets are going. Good reporting includes a comparison of predicted market moves with reality. This can result in healthy humility.
Providing good forward-looking information is another area where most pension funds have work to do. Assessing the impact of forward-looking scenarios is a very helpful method to narrow down the decision-making to which actions are acceptable and which are not. Whilst choosing scenarios will bring its own challenges, it is certainly a lot better to think about what might happen than to just expect that your (or the investment consultants’) assumptions will come true.
If that all sounds like hard work, bear in mind that the sponsor often has their own reporting demands on the pension fund and that regulatory reporting requirements will only increase in coming years. Pension fund investment decision-making truly does require hard work.
20 June 2018 – Simone Lavelle attended this annual lunch focused on FTSE 350 research.
Avida hosts: Trustee Board and Investment Committee Decision-Making – what reporting support do you really need to be effective?
19 June 2018 – Peter Kolthof, Partner and Country Head for Avida International in the Netherlands, introduced the subject and discussed his extensive experience of best practice in decision-support reporting. He laid down some challenges about how trustees make use of an executive team and advisers. This was followed by a roundtable discussion and a summary can be found here.
18 June 2018 – Simone Lavelle attended this meeting on Chinese EQ.
Delighted that Sally Bridgeland is a Finalist for ‘Role Model of the Year’ in Professional Pensions Women in Pensions Awards 2018.
3 – 4 May 2018 – Dorothee Franzen and Tim Juling attended the annual conference of the German pension fund association.
7 March 2018 – Simone Lavelle attended this event.
27 February 2018 – Avida International organised a breakfast roundtable on running DB pensions from a CFO’s perspective. Annemarie Straathof talked about the governance changes she, as CFO Europe for Rabobank, helped effect during the last couple of years at their UK pension fund. This was followed by a roundtable discussion and a summary can be found here.
21-22 February 2018 – Simone Lavelle attended this event.
20 February 2018 – Bart Heenk attended this Summit.
24 January 2018 – Simone Lavelle attended “Finding Opportunities in a Volatile World” in London.
21 November 2017 – Simone Lavelle attended this conference in London.
14 September 2017 – Dorothee Franzen attended the 11. Villa Mumm Konferenz: Investmentperspektiven und aktuelle Trends in der betrieblichen Zukunftsvorsorge
26-28 June 2017 – Simone Lavelle attended this event at Castle Coombe.
8 June 2017 – On some occasions the trustee board of a pension fund is bigger than the executive team, leading to more ‘managers’ than ‘doers’. At our most recent breakfast roundtable we considered what the right mix might be and how the governance model should work.
If you are a senior pension fund director/trustee interested in attending our roundtables in future please contact firstname.lastname@example.org.
Dorothee Franzen chairs Financial Literacy session at 15th International Conference on Pensions, Insurance and Savings
Dorothee Franzen participates in the Annual Conference of the German Association for Occupational Pensions
Peter Kolthof chaired two Financial Investigator roundtables – one for providers and one for pension fund clients.
During the roundtables, the importance of soft factors (match in culture) next to hard results was stressed, as well as the continuous and independent evaluation of a fiduciary manager.
1-3 February 2017 – Sally Bridgeland was a panellist at the Institutional Investor European Pensions Symposium focused on ‘Meeting long-term liabilities in an age of unpredictability‘.
13 October 2016 – Avida International celebrated it’s 10th anniversary with a London-based seminar on crisis management for pension funds. The keynote speaker was General Sir Richard Shirreff, Deputy Supreme Commander of NATO Europe 2010-2014 who talked about how the military deal with crisis management. He was joined by Martin Reeves, Senior Partner and Managing Director at the Boston Consulting Group’s New York office, and Director of the BCG Henderson Institute, who looked at adapting strategy to a changing landscape; Paul Boerboom and Sally Bridgeland of Avida International who gave practical examples of risk management and the lessons that can be learnt by the pensions industry; and Bart Heenk also of Avida International who talked about the importance of repeated practice and thorough preparation. The day was chaired by Professor Gordon Clark, Avida International Advisory Board member and Director of the Smith School of Enterprise and the Environment, University of Oxford.
A brief summary of the day can be found here.
10 June 2016 – Bart Heenk (MD, Avida International) chaired a panel discussion at the IPE 360 Conference at the London Stock Exchange. Joining him on the Panel were David Adkins (Chief Investment Officer at The Pensions Trust) and Anthony Webb (Head of Fiduciary Management Research at KPMG). The topic was:
Making Outsourcing Work: Fiduciary Management and other forms of Investment Strategy Delegation
The audience consisted of the leading pension fund representatives from the UK, Netherlands, France, Germany, Belgium and other key European pension markets.
The discussion centred around the importance of being able to judge the value of outsourced activity. Financial data – such as performance, costs and risk – are only one factor in this; softer human factors – such as communication, trust and innovation – are just as important, though not always easy to quantify. Another topic was the importance of pension funds not being talked into a provider’s outsourcing model, but to work out precisely what their own needs are before deciding on who the provider should be. Too often investment consultants are leading the debate and transferring their pension fund clients from an advisory to a delegated model, whereas the best solution for the pension fund might be an altogether different method of outsourced decision-making. It was agreed that a proper and independent analysis has to precede the decision to change the mandate.
By Susanna Rust on IPE, 10 May 2016
European pension funds need to make a “fundamental” behavioural and cultural shift to close “a yawning gap between the rhetoric of governance improvements of recent years and their reality on the ground”, according to a paper from The 300 Club, a group of investment professionals seeking to challenge mainstream investment practice and thinking.
Read the full article on IPE.
Sally Bridgeland talks about defining the measures of success before going in-house in Pensions Expert
By Sophia Grene, Financial Times, October 19, 2015
After a number of false starts, fiduciary management, where the day-to-day management of a pension scheme is outsourced, seems to be taking off in the UK market.
“My best guess is that, in five years, more than half of defined benefit [pension] assets will be run under some form of fiduciary management,” says Chris Ford, global head of investment at Towers Watson, the consultancy.
Fees and costs are controversial issues in the investment industry. Steven Charlton, Aisha Dudhia and Bart Heenk break down the key challenges in the discourse in the Autumn issues of Professional Investor. Bart Heenk: “The average pension fund trustee has limited insight into management fees and no idea of the true costs. This is largely because there is not attempt by the industry to provide clear and complete reporting. In fact most costs are, and remain, hidden unless you specifically ask for them.”
Read the full article here.
Bart Heenk spoke about the trend of outsourced models such as investment consulting and fiduciary management at the Sanlam Investment Institutional Insights conference in Sandton, Cape Town.
Sally Bridgeland: “Looking beyond the UK may provide lessons on how maturing pension funds can rework investment governance.”
Rembrandt’s self-portraits show an honest, unflattering, self-awareness as he aged. At a recent discussion event in London, large and maturity UK pension funds were candid in challenging their limitations and knowing their weaknesses. While UK pension funds still have long-term time horizons, these will diminish and will have a bearing on whether it is worthwhile establishing in-house resources to manage long-term illiquid investments.
Read the full article at I&PE.