European Pensions //iorp.eu

A busy week of acronyms

Thu, 18 Jun 2009 02:56:07 PDT

Today, influential Swiss daily Neue Z�rcher Zeitung NZZ has my article on XBRL. Which is perfect timing because of the forthcoming workshop that XBRL CH is organising next Monday. The subject matter of that event is the US SEC's new XBRL regulation, which is applicable for foreign filers as well - so, rather targeted. Back to back, but more generic, is the big XBRL show in Paris, beginning on Tuesday through to Thursday. Interactivity!

Impact of accounting and prudential regulation on pensions

Sun, 14 Jun 2009 23:33:42 PDT

"A long-term view involves short-term risk, whereas a short-sighted strategy involves increased risk over the long term."

EDHEC just released its impressive report Impact of Regulation on the ALM of European Pension Funds. Even though we disagree in some instances, we think this is mandatory reading for anyone in the pensions investment space because it highlights those areas of regulation which will be of increasing consequence for pension funds' investment strategies in the near future, as we have continued to stress over the recent past.

At the core of the report is the development of an asset allocation model in the presence of liability constraints. The solution involves the components cash, risky assets and the liability hedging portfolio. The state of the art model takes inflation and longevity risk management into account as well.

There is not enough space nor time for an in-depth review of this valuable piece. Nevertheless, I would like to mention two issues that have slightly moderated my enthusiasm for the report:

There seem to be a few at least implicit factual inaccuracies in the parts describing the regulatory environment. The most glaring of which may be the assumption that the EU pensions directive is applicable in Switzerland - it is not.
Accounting standards seem to be understood to effectively determine investment action. While it is not unheard of that managements structure transactions in such ways as to optimise their reporting, this clearly goes one step too far. We are well aware of the interdependence between perception (qua accounting standards) and (economic) reality, but at least in an academic report, the latter needs to retain some vestige of predominance over the former. Remember: pension funds' long-term time horizon, as accounting standards can and do change.

Longevity in Switzerland

Tue, 26 May 2009 03:42:14 PDT

It is hardly a coincidence that the Federal Office of Statistics publishes a new study about the Future of Longevity in Switzerland (German, French) today. There is an upcoming referendum to decide about the proposed reduction of the transformation rate with which accumulated pensions capital will be transformed into annuities. Longevity expectations are an important factor in that hotly contended issue. The study expects an additional 5 to 9 years of life expectancy gains over the next 20 years with a continuation of morbidity compression.�

Behavioural finance

Wed, 20 May 2009 14:44:59 PDT

Behavioural finance is a fashionable topic, of course, and an interesting one at the same time. It is useful to be aware, if that's possible at all, of the cognitive limitations of our decision making processes. Yet, I still have to see a useful active behavioural tool for investing - much of those uses seem to be limited to technical analysis.

This video reminded me of a similar presentation by Richard Thaler at this year's CFA Institute annual conference in Orlando. The biggest surprise in that presentation was that XBRL featured prominently in it as an important tool for improving financial decision making.

P.S. This podcast interview�with Ariely gave me some food for thought. There is probably a fruitful tension between the rational expectations axiom and what Ariely calls predictably irrational. It can be a rational to expect collective irrationality.�

On 2nd derivatives, green shoots and inflection points

Thu, 14 May 2009 12:22:02 PDT

We don't do investment advice on this blog. But all the hopeful talk about green shoots has also provoked this nice�Buiter comment. To turn bullish on the news of an inflection point after what may easily have been the world's sharpest inventory rundown in human history requires a foolhardy degree of optimism, given that the economic growth trajectory is no sinus curve - another inflection point may easily occur before we're actually coming across a turning point.�

Accounting standards - pass or fail?

Wed, 13 May 2009 04:04:42 PDT

Swiss economic semi-weekly Finanz und Wirtschaft had a lead article�(in German) by Prof. Straubhaar the other day with which I almost entirely disagreed. In short, he gave international accounting standards a fail because they amplified the financial crisis. He preferred continental accounting standards and does not even mention investor requirements. Unfortunately, this reflects much of the continental European consensus, which is why �I wrote a somewhat extensive rebuttal.�This was published today.

Moving GIPS to the 21st century

Wed, 20 May 2009 07:11:36 PDT

Here is an idea that I am currently working to promote to the Global Investment Performance Standard community:

MOVING GIPS TO THE 21ST CENTURY

Context
CFA Institute's�GIPS�are similar to Accounting Standards in that they prescribe in some detail the concepts, requirements and procedures for reporting performance of asset managers' investment vehicles. The purpose of GIPS is to make asset managers' reported performance numbers consistent and comparable across several providers and facilitate manager selection by investors on the basis of the manager's track record. According to the CBRM, financial reporting is made for investors. The same applies to GIPS reporting. Therefore, the same compelling logic that has driven the SEC to mandate the�XBRL�format for business reporting of all listed entities and mutual funds in the US should apply in the case of (voluntary) GIPS reporting, at least in so far as the premises for XBRL reporting of GIPS numbers should be prepared.

In the course of the GIPS 2010 project, it is essential to lay the groundworks for bringing GIPS online, i.e. making GIPS reports even more quickly available and comparable with XBRL.

What is necessary?
As with financial reporting, the key requirement to enable GIPS reporting using XBRL is a�taxonomy. The GIPS taxonomy, like FASB's US GAAP taxonomy or the IASB's IFRS taxonomy, contains all the concepts and relationships of GIPS without impeding the reporting entity's flexibility in disclosing additional items by using its built-in extensibility. Taxonomies are usually created and maintained by cross-sectional working groups of stakeholders under the umbrella of an XBRL jurisdiction. The extent of the effort to build a taxonomy depends on the standard it is intended to represent. In the case of GIPS, it seems natural that CFA Institute takes on the responsibility for creating and maintaining the standard GIPS taxonomy.

What can be achieved?
The availability of a GIPS taxonomy is a necessary, but not a sufficient condition for establishing XBRL GIPS reporting. Preparers and users have to follow suit and establish practice. However, if the example of accounting standards is any indication, it is crucial that the Standard Setter (CFA Institute) endorses XBRL by creating a taxonomy for its standard and thus providing the infrastructure on which usage can be built.�

As�multiple case studies�show, deploying XBRL in the reporting value chain of GIPS will result in smarter, cheaper and faster GIPS reports: They are smarter because the validation procedures built into XBRL taxonomies from the start massively reduces errors in reports, thus also reducing the cost of preparing and verifying them. They are faster because they can be made available online immediately and can be compared automatically without re-keying any information.

Given XBRL's widespread and quickly expanding application in financial reporting, competing IT tools at all stages of the reporting process are already available and are improved continuously. These tools are usually agnostic of the taxonomy they are applied to, thus they are usable on GIPS reporting. It is easily imaginable that the�SEC's Mutual Fund Viewer�could be applied to GIPS reports, provided that they collected in a single location online. Perhaps there is another role for the CFA Institute in this? The ongoing parallel development of IT tools handling XBRL formated financial reporting constitutes a very important synergy that GIPS can take advantage of effortlessly.

"Resistance is futile ..."
And yet, the Borg are�effect-fully�resisted in Star Trek. Clearly, GIPS is a well established global standard�that works. It is therefore not immediately obvious to practitioners in the field why the plumbing of the process should be changed. Incidentally, there is no recognisable�need�to move to XBRL at the present.�

Yet, the transformation of the financial reporting process to XBRL has met and is in the process of overcoming the same resistance globally. The potential gains in transparency and process efficiency are too large to dismiss.�

Finally, there is another factor that makes the case for adopting XBRL in GIPS even more compelling: GIPS is not mandated anywhere (to my knowledge) and thus fully dependent on voluntary adoption as well as market demand. The availability of a GIPS taxonomy and CFA Institute's encouragement of the usage of XBRL in GIPS reporting would send a clear signal about how GIPS is being future proofed and made increasingly transparent and user-friendly.

XBRL - A Guide for Investors

Tue, 05 May 2009 14:24:58 PDT

CFA Institute has just published XBRL - A Guide for Investors. The title is pretty much self-explanatory. I'm glad to have contributed to it. Enjoy!�

Also on the XBRL channel: Yesterday, L'Agefi published an article I've written. But when you follow the link, you'll see that it is written in excellent French, which cannot be me. Thanks for the contact and the translation goes to Marc Barbezat, member of XBRL CH!

Investing in infrastructure

Wed, 22 Apr 2009 15:31:45 PDT

OECD has an informative recent overview paper Pension Fund Investment in Infrastructure. The author looks at whether or not infrastructure deserves to be classified as a separate asset class (the evidence is inconclusive), risk-return profiles and benchmarks and other key items. But most interesting is the assessment of the barriers to pension fund investments, of which there are a great many. These are probably hard to overcome, except for the best run of institutions.

New online resources

Wed, 22 Apr 2009 03:59:01 PDT

The design is about as appealing as can be expected from a body of professional accountants, but we are talking about the newly free access to an important part of the world's economic operating system, namely International Financial Reporting Standards, together with the statements of International Financial Reporting Interpretation Committee (IFRIC) and Standing Interpretation Committee (SIC). Now we have the narrative to go with the taxonomy ...

Slightly less globally relevant is the recent availability of the Swiss XBRL Jurisdiction's website.

The tyranny of the present

Sat, 28 Mar 2009 16:50:49 PDT

In a recent issue of its flagship publication Sigma, SwissRe described Scenario analysis in insurance, identifying scenario analysis as a key tool to analyse fat-tail risks and their impact on profitability and competitive position of insurers. One of the pioneering sources of scenario analysis is the approach developed by Shell. Whereas scenario analysis is referred to as a key tool for both strategic planning as well as enterprise risk management of insurance, Sigma reports with some degree of astonishment that banks do not use it to assess their total enterprise risk exposure.

Applying the concept of scenario analysis to pension funds should be self-evident, not least if you think of a pension fund as the insurance subsidiary of your firm. It faces a set of opportunities, threats and parameters quite similar to those of an insurance, yet scenario analysis is not common in the pensions industry. Nevertheless, a number of pensions-specific scenarios easily come to mind: a jump in longevity due to unexpected medical progress, prolonged negative real interest rates, a pandemic (as explained in Sigma), regulatory changes to the competitive landscape ...

The Economist Intelligence Unit has just come up with its own bleak exercise in scenario analysis (hat tip Global Guerrillas). Its central forecast of stabilisation is assigned a probability of just 60%, whereas the more disruptive instability scenarios are assigned 30% (de-globalisation) and 10% (collapse in USD) respectively. Scenario analysis has been posted as a means to escape the tyranny of the present, but being where we are today, we are not so sure this is a good thing.

Capital preservation

Fri, 06 Mar 2009 15:07:19 PST

As an institutional investor, we are always interested in informative long-term charts. This one fits the bill, even though it is probably meant to shock today's investor with its implicit statement that there was no money to be made in 43 years of investment in the Dow.

However, some qualifications need to be made. The obvious one is that the chart is just a price chart corrected for inflation, but without taking into account the dividend yield, which is probably about 5% p.a. by now. Getting that kind of return on top of real, inflation-adjusted capital preservation on a long-term basis is no mean feat indeed!

XBRL presentation in Brussels

Fri, 06 Mar 2009 15:00:13 PST

Here are the slides of a presentation I gave a few days ago at the Brussels Stock Exchange. That was probably the most splendid place I spoke at to date.

Finance 2.0

View more presentations from SCFAS. (tags: cfa accounting)

In the balance

Fri, 30 Jan 2009 07:39:30 PST

The latest issue of the CFA Magazine has an article that I penned about accounting politics, meaning the high-risk game that high politics is playing with the international accounting standards setting process. The issue has been dormant during the last few weeks, but is sure to come back with a vengeance shortly, i.e. during the G20 meeting on 2 April in London. Comments, as always, are highly welcome!

Mortality-linked securities

Wed, 14 Jan 2009 05:16:05 PST

The Pensions Institute has an excellent new paper on�Mortality linked Securities and Derivatives. The paper describes the problem (longevity risk) and what conclusions can be drawn from present experience in pensions buyouts and securitisation transactions. They also discuss the pricing of longevity risk in the absence of a liquid mortality-linked capital market. For a complete picture, we'd be interested in the fallout of the present turmoil in the asset-backet securities and credit derivatives space on mortality-linked securities ... �

Victims (III): Prudent Person in Switzerland?

Mon, 12 Jan 2009 03:46:09 PST

Until the beginning of this year, Swiss pension funds were obliged to follow a detailed set of investment restrictions laid down in a government regulation, or obtain a formal waiver to deviate from these restrictions. The more sophisticated institutions have made use of that opportunity, which is why what once was supposed to be an exemption now had effectively become the rule.

This has changed with the new investment guidelines of articles 49 ff. BVV 2 which have entered into force on 1 January. The number of investment restrictions has been curtailed substantively and the alternatives�asset class has been made available. Yet, the government has stopped short of introducing the prudent person rule as there are still a large number of small iorps which appear to feel more comfortable following a prescribed asset allocation, despite their objective needs. That is probably the line of thought that MPs followed who criticised the changed guidelines massively. �They seem to think that parliament knows best what an appropriate asset allocation strategy should be. It is unfortunate that even the most moderate of reasonable changes come under political pressure as a consequence of the crisis.

Effectively, the new investment guidelines are a reluctant, small step in the right direction. But they clearly fall short of the EU's state-of-the-art Pensions Directive 2003/41 in fundamental ways, most evidently in the restriction on equity investments to 50% rather than 70% as per the Directive. Also, a target return in line with money and capital markets and real estate returns seems to be at odds with member interests. Consequently, it is hardly surprising that the magic triangle of Risk, Return and Liquidity is cut down to a single Risk-Return line. There is also a degree of over-diversification in the prescription that alternatives exposure can only be taken through (expensive) collective means. Finally, there seems to be an editorial error in art. 60, which appears obsolete, given art. 50.4/5. There is a lot left to do. Here's to hope that the crisis will not preclude the necessary changes.

Wikinomics in finance?

Sun, 28 Dec 2008 08:26:13 PST

I quite enjoyed reading Wikinomics, although it took far too long. It's an interesting and engaging overview of the latest impacts that mass collaboration has on all sorts of business models. I was particularly surprised to see how many big names were already successfully active in that space. Which begs the question why, apparently, none of them are in the finance industry?

In essence, the Wikinomics principles�consist in Being open, Peering, Sharing and Acting globally. Classifying these as principles implies that they are to be applied diligently and carefully as they might kill off any business model otherwise.�

Much of what being open, peering and sharing stands for appeared to be synonymous to me at first, so let me try to identify the differences. Transparency, or being open, could be seen as a catch-all term for peering and sharing. In the Wikinomics sense, it means to provide some sort of access to one's business model. Peering refers to a non-hierarchical production mode where control can only be exercised in a very limited way (for instance by providing a rule book and/or a platform). Sharing means that control over pieces of intellectual property is given up, implying that others can take advantage of it if they discover profitable ways to do so. Wikinomics impressively demonstrates the application of these principles in a number of industrial settings, mostly dealing with immaterial assets such as engineering knowledge, software, IP and other know-how.�

Those principles of wikinomics seem to be anathema to the domain of finance, though. Historically, this industry is rife with control, secrecy and exclusion. Is it inevitably so, though? I don't think so. It is probably inevitable when it comes to the client relationship (yes, the Swiss perspective) and the deployment of capital, which is exclusive by nature. Also, the characteristic of finance as a regulated industry will constrain the applicability of wikinomics as long as it is not embraced by the regulator.�

When it comes to all other aspects of know-how in finance (risk management, asset management, investment research etc), however, I see no reason why they could not be profitably opened up to wikinomics, especially when there is a premium on transparency in times of crisis. The Tapscotts themselves propose to apply wikinomics to risk management, but unfortunately, they stick rather close to the surface IMHO. It will be interesting to watch IBM Data Governance Council's initiative for XBRL in risk reporting.�

However, without regulatory leadership or at least explicit support, such initiatives are destined to fail or thrive only in un-regulated niches, which are likely to shrink going forward. �A pet project for Ms Schapiro? Here's to hope!

Redefining Old

Sat, 27 Dec 2008 08:03:39 PST

Nomura has an excellent piece of research out that goes well beyond what that genre usually entails in the brokerage space. The Business of Ageing is an extensive discussion of the key risk of the pensions industry that is longevity, its implications for the real economy, financial markets and the major industries. I particularly value the section about longevity with its discussion of the technophysio approach which, in combination with longevity convergence across countries, is posited as leading to rapid longevity growth. Where official UN projections arrive at an average life expectancy of ca 85 years in 2050, Nomura models predict ca 90 years.�

Redefining Old refers to another interesting aspect of the paper: Whereas a social security definition in terms of years lived will lead to an increasing share of the "old" cohort burdening social security, the authors argue that with increasing healthy life expectancy due to morbidity compression, it will be reasonable (i.e. necessary) to expect people to work (much) longer. The authors pinpoint that age at about 80, which would be suicidal for any politician to ask for. Note that this blog has argued for the same number before.

Virtually unseen in brokerage research is the extensive, up-to-date scientific apparatus provided. The label useful is fully deserved.

As a side comment: In spite of Switzerland's claim of having an exemplary retirement system that is the envy of the world, her only (and favourable) appearance in the paper is in a table about obesity ...

XBRL final rule imminent

Thu, 11 Dec 2008 04:00:17 PST

Well, we've got something wrong there, it seems. It wasn't the US SEC meeting deliberating on the final XBRL rule that was scheduled for 10 December, it was a Sunshine Notice�to announce the SEC meeting of 17 December. But what's a week in the greater scheme of things ...

Speaking of which - it's interesting to note that one of the seven milestones on the road to IFRS adoption in the US is going to be improvement in the ability to use interactive data for IFRS reporting (p27 ff). Specifically, the SEC would look for a more detailed IFRS taxonomy in its 2011 review, presumably containing standard industry extensions. Thus, XBRL has just been hiked up to a critical priority in a strategic project.

Death and taxes ...

Mon, 08 Dec 2008 05:27:44 PST

This is an excellent presentation by Governor Jens Thomsen of the National Bank of Denmark, on how to hedge and invest in an environment where average life expectancy rises by over 5 hours every day. He proposes that governments should issue more ultra-long term bonds to create a hedging substrate for that time horizon.�

What Thomsen does not address, however, is the challenge to such instruments arising from an investment environment with massively higher government debt, as it is foreseeable in many countries. The temptation to apply the inflation tax to reduce such debt may be overwhelming, which is why such ultra-long bonds should be issued with an inflation protection.

XBRL final rule imminent?

Fri, 05 Dec 2008 02:24:09 PST

I've been looking for a confirmation of what David Blaszkowsky of the US SEC said during yesterday's XBRL conference here in Warsaw, namely that he'd been given clearance to announce a Commission meeting to be held on Wednesday, December 10, during which a final XBRL rule will be discussed and possibly approved - but I couldn't find anything, yet. So, there's something to look forward to next week ...

Accounting politics

Mon, 01 Dec 2008 15:44:26 PST

On Saturday, Finanz und Wirtschaft has published an article of mine in which I discuss�the background to the current tensions in accounting politics between the EU and the IASB. To the casual observer, this conflict may look like it is entirely related to the financial crisis, but it is more about the independence of the IASB than anything else. That's where the interest of every investor should come into the equation.

Highlights from XBRL conference

Sun, 28 Dec 2008 14:20:21 PST

Highlights from the CFA Institute conference XBRL for Investment Professionals, held on 26 September in London, are now available as podcasts from the CFA Institute. They are available for free to CFA Institute Members, just login with your usual credentials.

P.S. They are not free to Members, just to conference participants ... sorry!

IORPs up 46%

Sun, 23 Nov 2008 05:05:57 PST

The number of cross-border IORPs active in the EEA has risen from 48 to 70 over a time period of 18 months, according to CEIOPS' 2008 Report on Market Developments. Cutoff dates were January 2007 and June 2008, respectively. The bulk of those cross-border plans is still focused on the country pair Ireland - UK, representing 50% of all plans, down from 60% on last count. Most of the activity happened in Austria, Belgium and Luxembourg. Removing the basis effect of plans�that have been in operation prior to the implementation of the Pensions Directive, the growth in plan numbers increases to 244%.

While it's good to see some activity picking up, it's still too slow to constitute significant momentum, even if rebased.

Interview

Wed, 19 Nov 2008 04:33:10 PST

Head over to the Data Interactive blog for an interview with me about XBRL from an investor's perspective - and don't forget to come back!�