Comment on “Public Pension Fund Management: Best Practice and International Experience”

Abstract

Rozanov (2015) tries to answer the question of what are the important issues for improving pension fund management? I think that important issues are related to pension design, pension governance, investment management, and collaboration strategies. Rozanov focuses on a little bit of pension design, but is mainly devoted to pension governance and investment management. Rozanov's investigation succeeds quite well because his coverage of pension governance issues and investment management is well documented and well selected from the main stream of the pension management revolution over the past 20 years. I would like to focus on his proposals for the Japanese Government Pension Investment Fund (GPIF) because as the deputy chairman of the GPIF's investment committee I am responsible for designing the reform plan for the GPIF now and in the future. Rozanov proposes two steps: first, applying the 12 principles of best practices and investment philosophy framework summarized in Table 1 to evaluate the current state of affairs at the GPIF, and second demonstrating a long-term vision that Japan's reformers can bring to GPIF. His recommendations are similar to my suggestions to the GPIF and the Japanese government. Mission clarity with full stakeholder commitment A highly competent investment function with clear responsibilities and accountability Appropriate resourcing of each element in the investment process and governance chain Strong and effective leadership at the board level (chairman) and the executive (chief executive officer) Clear and meritocratic procedures for nominating, selecting, and evaluating board members Effective compensation practices An investment philosophy rooted in strong beliefs and enjoying fund-wide support A clear and shared understanding of the institution's comparative advantages and limitations A risk budget aligned to fund goals and incorporating an integrated view of “alpha” and “beta” Utilizing flexible decision-making systems that function in real time Effective use of external managers via clear mandates, aligned goals, and rigorous evaluation Developing a learning culture focused on change and innovation Rozanov recommends the Canada model for three reasons: compelling risk-adjusted, net of cost, long-term returns on a large asset base; classic pension fund liability profiles; and the importance of investments in domestic markets. I agree with his recommendation because of these three points. Rozanov also shows five important characteristics of Canada model: operational autonomy and board independence; a high degree of delegation and investment management flexibility; direct investment by internal teams in less liquid, private market assets; the opportunity cost model and reference portfolio; and leadership in innovation. His points are also right. Rozanov also suggests starting first with Norway model, mainly a traditional asset portfolio, then moving to the Yale/Australia Future Fund model, a well-diversified portfolio with a small number of investment staff, and finally moving to the Canada model with a well-diversified portfolio, a large number of staff and strong internal investment capabilities. This suggestion might be right, but I would like to suggest a path that is a little bit different from the one that Rozanov suggests. The most important first steps by the GPIF would be the separation of the oversight and execution functions, and the establishment of an independent and expert board of trustees. If we can establish a board of trustees independent from the government, everything will change dramatically. As Rozanov (2015) correctly points out, “the fund's investment style and strategy its governance budget: all else being equal, institutions that can bring in trustees with higher levels of expertise, more time to spend on governance, and a stronger commitment to work collegiately to a common goal should be better positioned to run more sophisticated and more effective investment programmes.” Governance issues matter a lot. Rozanov also correctly points out that the size and the quality of leadership will be important for better pension governance budgets. Finally, Keith Ambachtsheer, who is my mentor with respect to pension governance and who was the chief advisor to the reform commission of the Ontario State Teachers' Pension Plan in 1990, pointed out that the most important issue of pension governance is the establishment of an independent and expert board of director.