View Point: Return From Oz

Delivering the best possible net risk-adjusted rate of return. Markets may not be completely efficient, but consistently doing better than the long-term return/risk of listed indexes requires doing the basics right: knowing where your assets are, how much risk they are exposed to, and how much return is left for clients after everyone gets paid for their efforts. Size matters. AIMCo’s asset size is close to an efficient scale of around $100 billion. Scale brings cost economies, in part because it makes it affordable to have a strong internal investment team, compensated for results on commercial terms. Having internal capability and authority to make quick decisions, in turn, makes an organization attractive as an investment partner, providing access to superior opportunities.

What should plan sponsors do to ensure that plan members have enough savings to retire?

The adequacy issue is serious. Only in the last 100 years have we had to worry about a ‘ripe old age.’ With life expectancy moving beyond 85, it will become difficult for most people to save enough to retire at age 65 or younger. The future will likely be in structures that combine individual accounts within risk-shared investment vehicles. When people did not live much past 60, having an employer guarantee a pension was not an expensive way to cement employee loyalty. In a mobile society with lots of structural change in corporations, we need new vehicles where large groups of individuals come together to trade off freedom to pick investment options for reduced long-term pension income volatility and longevity risk.

What are your views on alternatives?

Alternatives have become the Aladdin’s lamp of pensions: rub me the right way and great return is yours. It is not that easy. I love unusual assets, but copycatting what worked for some funds 10 years ago will not guarantee success over the next 10 years.

We likely will have to invent our own alternatives. Truly spectacular returns do not persist when an ‘alternative’ goes from unappreciated to mainstream: popularity erases all the excess return or more. More leverage may keep gross returns high for a while, but, as we saw recently, that game can turn sour. Over the next few years, ordinary credit and equity markets may do just as well, particularly after fees. Small funds buying these assets from external managers can probably not do so on reasonable terms. The biggest risk is buying because ‘if it is good enough for the big guys, it’s good enough for me.’ Purchases of alternative assets are often not subjected to the same scrutiny as more conventional listed securities.

What do you see as the main trends and innovations in the pension area in the near-term? Over the long term?

We need to find pension structures that can deliver the efficiency of the DB to DC world. An extra 1% net pension return per year raises annual retirement income by a third. We need to use better systems to cut the cost of servicing individual accounts. Some individuals are quite capable of making their own pension savings arrangements. Most people need help, but they typically pay too much for customization when real options are limited.

What do you think the future holds for pension plans in terms of the DC versus DB debate? Is DB on the decline?

The shift to DC is a direct result of severe underestimation of the long-term cost of DB pensions. People live a lot longer than they used to, and employers and employees typically find it hard to agree on better sharing of the risk of pension underfunding. Going to DC cuts an employer’s pension funding risk, but does not deal with pension adequacy, longevity risk and the higher operational cost of DC.

What will you miss most about Australia?

For Canadians, Australia requires little adjustment. Multiply most things Canadian (population, GDP, geographical size) by two-thirds and you get Australia. Melbourne and Toronto are similar-sized, livable, cosmopolitan cities. People treated me well. Melbourne is very Victorian and still has a British social veneer. Trams and lots of coffee shops give it a relaxed European flavour. Yarra Valley wines are great, and I became quite fond of the bike trails along the Yarra River that meanders through the city.

Are you excited to return to Canada?

This is a great opportunity to come back for. The AIMCo Crown Corporation structure is right. There is strong political support for making this an independent entity operating on commercial terms. The board is very supportive. If the stars remain aligned, one could do some really interesting things here. I am sure it will have its challenges, but as long as that leads to progress, that does not bother me.

Edmonton has a marketing issue. Discussing the move from Melbourne to Edmonton invariably elicited the phrase ‘minus 40.’ However, having lived in Ottawa and Madison, Wis., that does not faze me. I have since learned that the city has lots to offer if you look in the right places.

Brooke Smith is associate editor of Benefits Canada. brooke.smith@rci.rogers.com

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© Copyright 2008 Rogers Publishing Ltd. A shorter version of this article first appeared in the August 2008 edition of BENEFITS CANADA magazine.