European Pensions //iorp.eu

Trust, where trust is due

Sun, 30 Jan 2011 15:23:00 +0000

The other day, I've had my first fleeting WEF exposure (with hat) when I presented my contribution to Trust Meltdown II during its launch event in Davos. In my piece (Trust, where trust is due), I look at trust as a policy objective which has substantial limitations under conditions of uncertainty (here is a taxonomy). Those limitations are under-appreciated in practical policy. This lack of appreciation is probably due to an involuntary anthropomorphism: trust, the aggregate state of an economy is mistaken for trust, the interpersonal concept.

Read the intro to Trust Meltdown in Roland Schatz' Washington Post column.

NZZ on life tables

Wed, 26 Jan 2011 23:34:00 +0000

Influential Swiss daily Neue Zürcher Zeitung has quoted me on the subject of the appropriate choice of mortality tables for Swiss pension funds (here and here, both in German). Most Swiss pension funds still use period life tables rather than the more realistic cohort life tables (for a distinction see here - nothing useful on Wikipedia, but a nice Wolfram demo here). Cohort tables are preferable because they better reflect increased longevity, whereas period tables have to be adjusted manually. Given that longevity continues to improve, the use of period tables will give systematic advantage to the present pensioner cohort at the disadvantage of future cohorts.

The recently published "technical basis" BVG2010 makes available a set of cohort life tables for the first time. It would make sense for pension funds to adopt that new basis as soon as possible, despite the consequential nominal increase of their liabilities.

Swiss Pensions Conference

Mon, 24 Jan 2011 21:52:00 +0000

Get your ticket now!

This time may truly be different

Sat, 15 Jan 2011 17:16:00 +0000

Here is a fascinating account of the impact of ageing on the balance sheet adjustment that much of the private sector is beginning to go through by the Deputy Governor of the Bank of Japan, Kiyohiko Nishimura. He claims that this balance sheet adjustment (aka de-leveraging) is unprecedented and qualitatively different from earlier episodes as it hits mature, ageing populations rather than growing, young ones. He demonstrates impressively how the downturn of the inverse dependency ratio coïncided with the busting of the property bubbles in Japan, the US, Greece, Portugal and Spain. He also addresses the ineffectiveness of monetary policy transmission mechanisms in that environment, obviously from the pioneer vantage point of Japan.

If this is confirmed, it may well be that we are at the early stages of a renaissance of a quasi-physiocratic movement. The thought is certainly fascinatingly plausible that the baby boomer bulge moving through the demographic "pyramid" has a strong (leveraged?) impact on housing prices: inflationary in the acquisition phase and deflationary during disposition. The impact reverberates into the highly leveraged banking sector via the mortgage leverage linkage.

The demographic shift is well documented for most mature economies. Another important driver that has more aspects of a zero-sum game may be that of migration: Anecdotal evidence for the small Swiss market shows a strong influx of well-paid foreigners into Switzerland in the recent past. This may be an important contributor to the upswing in the Swiss real estate market that the SNB is beginning to sound the alarm about. It probably compensates some, if not all of the ageing impact in this particular market. So I wonder whether central banks also watch migration.

Interestingly, the correlation between real asset prices and ageing populations was confirmed in an earlier BIS working paper, although the author was very cautious about his conclusions. The time series he analysed was much shorter (1970 - 2009), and he did not look at it from the perspective of the ongoing balance sheet adjustment. But as per Mr. Nishimura's view, that combination may indeed lead to "the distinct possibility that this time may truly be different."

Accounting science fiction

Mon, 13 Dec 2010 12:45:00 +0000

Here's a little piece of accounting science fiction I prepared as part of a recent XBRL presentation:

Friday, 2 December 2050 - EOB and weekend at last! Qifan Strittmatter relaxes, leans back and signs off from work. She is 75, citizen of Switzerland and the Chinese Federation and has been living with her husband in the NW state of Switzerland for the last couple of years. She looks forward to an early retirement from her job as CFO of Novroche.

She spent the past week mostly working on an important transaction which was communicated to the markets this morning. Novroche sells a large protein synthesis unit to a food conglomerate which had made an important discovery half a year ago. That discovery meant that the buyer could add more value with the unit than Novroche, hence the premium he was willing to pay over Novroche's valuations.

That premium has now been booked into the constantly live Finance Feed for which Qifan is responsible together with her team of 11 around the globe. The share price barely moved, though, as the transaction was built into expectations soon after the discovery was published.

In deep thought, Qifan's glance falls on a glass case containing a wonderful 1581 edition of Paracelsus' Opus Chirurgicum on loan from the firm's Art Fund. Those were the times when she helped prepare similar tomes every quarter! Sadly, the bigger the reports, the less they were used. Nowadays, things are quite different for sure: With her small team, she signs off on the Finance Feed which reflects everything in real time to the markets and - duly modified - to regulatory authorities around the world. Users make their own choice of the time horizon appropriate for their analytical task. In the case of extraordinary events like today, she has to make sure that automatic adjustments to historical KPI time series which analysts love so dearly are executed correctly.

Her main job consists in adjusting her Finance Feed for the modifications necessary as the Global Investor Reporting Standards (GIRS) get updated. Even more importantly, she has to make sure that the feed's parametrisation (they used to call that Accounting Policy in the olden days) delivers a faithful representation of economic reality at all times. The best ways to achieve that goal is a constant topic of conversation at the GIRS Committee, the global body of experts moderating the setting of GIRS in an extensive, yet intense mass collaboration effort. We've truly come a long way since the edicts of London and Norwalk, by means of which a small group of experts were trying to define the world economy's operating system. Doing that, they had to rely on a process predicated on historical precedent and contingencies which was anything but independent of undue political influence.

Today, that's only of interest to economic historians, daily life in the profession looks very different. And tonight, she looks forward to the trip to Strasbourg and her husband's dinner invitation at the Crocodile, a historic institution in its own right!

Of prudence and pretence

Mon, 06 Dec 2010 08:38:00 +0000

As indicated earlier, my article has now been published in the December issue of IPE. Unfortunately, the article contains two editorial mistakes: Replace "parametric" with "patronal" in the 3rd paragraph, and CHF 1bn is EUR766 mio today, not EUR460 mio. There are a number of other interesting articles about Switzerland in the magazine.

Your comments are very welcome!

XBRL Advisory Council (XAC)

Sat, 20 Nov 2010 22:01:00 +0000

I'm equally proud and humbled to read that my mandate at the XAC on behalf of CFA Institute has been renewed for a second (and last) term. To bring to bear the analyst / investor perspective on the (as yet barely existing) investor usage of XBRL is a tall order indeed, but joining forces with DVFA's Ralf Frank, there is a fighting chance to make sure that that angle's crucial importance remains recognised despite the low adoption for now.

The Future of the Occupational Retirement Act

Thu, 18 Nov 2010 18:26:00 +0000

The book Zukunft BVG (The Future of the Swiss Occupational Retirement Act) has just been published. I have contributed an article about the Prudent Investor Standard and its alleged implementation in Switzerland. The article will also appear in an abridged, English version in the forthcoming December issue of IPE, to which we will link as soon as it becomes available. Comments are very welcome!

Hedge accounting does not account for longevity hedges

Thu, 04 Nov 2010 16:31:00 +0000

Tuesday's ARG meeting was extraordinarily interesting, for it held a good and a bad surprise: Meeting the incoming IASB Chairman Hans Hoogervorst was a pleasant surprise, while discovering that the hedge accounting project underway will actually discourage longevity hedging if the standard were to stand as it currently does. This is a consequence of the proposed architecture of pensions accounting. Hence there appears to be no easy way out.

However, this outcome is deeply unsatisfactory and should be addressed. While there are not very many cases to account for at present, it would be unfortunate indeed if effective management techniques for the second most important risk facing pension funds were developed, only to be thwarted by accounting artefacts. Watch this space!

More XBRL in Switzerland

Sun, 17 Oct 2010 16:52:00 +0000

On 10 November, the second instalment of the XBRL CH Swiss Day (Agenda in German here) will bring an afternoon full of XBRL goodness in and to Switzerland. We will have a keynote on XBRL in the future of business reporting, two parallel tracks focused on Switzerland and IFRS respectively and finally, a closing panel which I'm looking forward to because of its composition and direction ("possibilities and impediments"). I'm particularly keen on the event because we will be releasing the first public draft of the Swiss OR Taxonomy into the wild for public comment. Please touch base if you're interested to contribute your comments.

The Power of Pull

Sat, 16 Oct 2010 15:19:00 +0000

The History of Information, by David Siegel from dsiegel on Vimeo.

Pull by David Siegel presents a fascinating introduction into the concept of semantic web, its technologies and options. He looks at a number of facets, with XBRL being prominent because of its advanced stage of implementation. Others are not so convincing: the fairtax chapter proposes no less than a tax revolution without even arguing why that tax system is superior to VAT - but this digression risks to escalate.

The book frequently refers to its own website, which shows interesting developments, but is painfully slow to build when accessed in a browser. Fortunately that problem goes away if you subscribe to its feed. Overall, Pull is a quick and easy to read introduction for non-technical people without much OWLing and RDFing. It's definitely worth your while if you're interested in the next evolutionary stage of the internet.

Reporting for the 21st century

Thu, 14 Oct 2010 09:36:00 +0000

I'm looking forward to giving a presentation (in German) entitled IFRS & XBRL - business reporting for the 21st century at the IFRS Update on 3 December. The only thing left to be done is the preparation of the actual presentation ...

XBRL in Switzerland

Thu, 12 Aug 2010 14:55:00 +0000

Schweizer Treuhänder has published the article about XBRL (German, French summary) which I've co-authored with Martin Welser of Deloitte in its August issue. As this is probably the first time that the term XBRL appears in the pages of this august publication, I am hopeful that it will raise the awareness of the profession in Switzerland.

P.S. After years of silence about XBRL in Schweizer Treuhänder, the current issue actually carries two items which conclude that XBRL plays an important part. The article Five years of IFRS accounts in the EU (German) concludes that XBRL is a key element to increase the comparability of corporate accounts under IFRS.

Seven faces of "The Peril"

Sun, 01 Aug 2010 14:25:00 +0000

What sounds like an Asian action flick is in fact an important research paper (~~server down, but~~ here's the exec summary) by James Bullard of the St. Louis Fed which has caught the markets' attention last week. The attention is well deserved as the paper demonstrates how current monetary policy concepts and postures might lead the world's largest economy(US) to join its second largest (Japan, for now) in a steady state equilibrium of very low interest rate / inflation. This second intersection point of the Fisher relation with the non-linear Taylor rule is a most undesirable place to be in, of course, because monetary policy is entirely ineffective there, but Mr. Bullard shows convincingly how we might end up there all the same. His proposed way out is quantitative easing (QE II) rather than the current monetary stance.

This leaves the Fed with uncomfortable short term choices: either stick to the current extended period (of very low interest rates) language with its associated Japan scenario, or start Mr. Bernanke's helicopters once more. Neither will be much appreciated.

Save the dates!

Wed, 21 Jul 2010 15:54:00 +0000

I've been invited to moderate the closing panel at this year's Asset Management Forum on To beat or not to beat - The active vs passive investing debate on 1 September in Zürich. It would be great to see you at that event. You can register following the link above.

The next date to save is a little bit further out: 9 March 2011. This is the date of the Swiss Pensions Conference, the preparation of which I am heavily involved with. You can watch the progress of those preparations under that link.

Longevity indices

Mon, 12 Jul 2010 23:15:00 +0000

Here's a useful and interesting paper on Longevity Indices and Pension Fund Risk. The abstract sums it up nicely:

Pension fund longevity risk is becoming increasingly important. Longevity indices would allow the creation of liquid derivatives that could be used to hedge this risk. However, there are a number of criteria that such indices would need to fulfil to provide an optimal solution, as well as a number of forms that the derivatives could take. These features are discussed, together with the characteristics of some existing longevity indices.

Longevity indices look like a viable risk management instrument, but given their utility bounded by liquidity and granularity, they are anything but trivial to design. Add to the mix an extremely fragmented market like the Swiss with its many small IORPs and their high volatility risk. Longevity risk also comprises level risk, trend risk and catastrophe risk. Interestingly, catastrophe risk is only seen as a one-off surge in mortality rates: "similar one-off falls in mortality rates do not occur." Black swans, anyone?

Limiting the scope of Standards

Mon, 12 Jul 2010 21:08:00 +0000

Fernando Restoy, Chairman of CESR-FIN, has given a remarkably candid speech about convergence, governance and - most notably - the link between accounting and other regulation to the eponymous recent IFRS conference. It is certainly going too far to list him as a supporter of our recent hypothesis, but his closing reference to the "somewhat excessive scope of the standards" certainly points in the same direction, especially when read in conjunction with Sir David's idea of a regulatory income account, which is probably little else than a reconciliation item between RAAP and IFRS.

EU Green Paper

Wed, 07 Jul 2010 22:15:00 +0000

The Commission has published its impatiently expected Green Paper towards adequate, sustainable and safe European pension systems today. The scope of the paper is very broad indeed, questioning the basics of the current EU pension legislation except - ostensibly - member states' responsibility for pensions. While initial reactions focus on incumbent battlefields such as solvency regimes for pension funds and retirement age, I would not be surprised at all if the intended discussion were soon to turn towards more comprehensive harmonisation, especially given the objective of adequate and sustainable pensions in the light of most member states' evident inability so far to reform their pensions systems sufficiently to rise to the double challenge of demographic shifts and inevitable fiscal austerity.

EFRP has started its own EU Pensions Debate website. It will be interesting to monitor the yield of the four month consultation period.

IORPs frozen

Mon, 05 Jul 2010 21:47:00 +0000

CEIOPS has just published its annual report on market developments. Given the uncertainty surrounding new legislative developments, it is unsurprising that the net new growth of cross-border IORPs within the EEA has ground to a virtual halt. As of 1 June, there were 78 active IORPs, compared to last year's 76. Interestingly, the gross growth of 7 has been almost entirely compensated by 5 withdrawals that were exclusively based in the UK, whereas the new IORPs are based in Austria, Belgium, Ireland and Liechtenstein (2 each).

Pooling

Thu, 01 Jul 2010 21:12:00 +0000

This nice illustration of the consolidation continuum that stretches from informational to comprehensively organisational is taken from the Aegon white paper on asset pooling. The paper is as good an overview of the issues involved as white papers go.

Time to revisit the G in GAAP?

Mon, 31 May 2010 16:53:00 +0000

Please find below the slides of the presentation I was invited to give today to the Swissholdings Expert Group Financial Reporting and Accounting. The Expert Group was interested in my perspective on standard setting and in how the Analyst Representatives Group to the IASB works.

It was a great opportunity to explain the mindset of users / investors to a group of highly competent preparers across industries. What struck me most was the concern voiced over lunch that what users are mostly interested in - which is performance reporting from a value perspective - is not what accountants / preparers feel comfortable giving. Their (idealised) concept of financial reporting is based on the general ledger and delivers a summary of past events in compliance with the regulatory framework. Obviously there is a major disconnect between that concept and the kind of forward looking, value based financial reporting that investors are looking for.

Perhaps it really is time to revisit the G in GAAP in the sense that Generally Accepted Accounting Principles designed to fulfil the needs of a number of stakeholder categories are simply becoming too unwieldy and too complex to manage and maintain. At the same time, technology is available today (XBRL) to give us multiple, tailored views of the same underlying economic reality to address the specific needs of the different stakeholder groups separately. What may be required then, however, is a set of interlocking SAAP - Specifically Accepted Accounting Principles which cater to the needs of their respective audiences, to wit: Regulatory AAP, Investor AAP, Environmental AAP, Tax AAP ...

Swiss Finance Institute podcast

Wed, 24 Mar 2010 14:17:00 +0000

Swiss Finance Institute has recently begun to provide video podcasts (iTunes link) of its public events. These are definitely worth following. A good example is Attilio Meucci's presentation about State of the art in asset allocation: Diversification management, which I attended in Zürich last week. In it, he discusses his new unified measure of diversification, which offers interesting quant properties. The paper that the presentation is based on is also available online, as are the slides of the presentation.

Nordic strategy evaluation

Tue, 23 Mar 2010 22:35:00 +0000

You should have a look at this extraordinarily thorough and methodic assessment of the allegedly active investment strategy of the Norwegian Government Pension Fund NBIM, which was commissioned from the Ministry of Finance in the wake of heavy losses during the crisis. The academic authors came to a number of noteworthy conclusions:

Their survey of current thinking about the Efficient Markets Hypothesis (EMH) suggests that EMH does not hold in practice, even though it is quite hard to consistently beat a market portfolio: "even modest levels of skill should lead to at least some part of the portfolio being actively managed".
The authors found that the fund's active strategy contributed a small, but statistically significant outperformance. However, they attributed this outperformance not as much to the active strategy per se, but rather to the exposure to a number of financial market risk factors (especially liquidity and volatility) as often used in hedge fund replication models. The lion's share of the fund's performance arises from passive exposure, which is why they consider the fund not to be an actively managed portfolio in first approximation.
Consequently, they recommend that effectively, a semi-active strategy be adopted which uses factor exposure as active bets rather than as an accidental byproduct of more conventional active strategies.

Comparing NBIM's size, resources and sophistication with those of the overwhelming majority of players in the field should give pause for thought in applying those considerations to other cases.

X marks the spot

Sun, 21 Mar 2010 19:12:00 +0000

In the March edition of CFA Institute's EMEA Newsletter Connexions, I have a tiny piece about CFA Institute's recent response (all responses) to CESR's call for evidence on the use of a standard reporting format. We still have a long way to go.