At a recent seminar of the Dutch Central Bank, organized for pension fund trustees, one workshop that I presented (in Dutch) dealt with the question of organisational changes in risk and investment management. There was a rather simple question to begin with: are the changes in domestic and international regulation random, or are there structural developments behind these changes? If the answer is random, then it makes sense for trustees to hold off major changes (pensions are long term decisions and not something to be trifled with in the short term), if they are structural, it makes sense to adapt, and implement those changes which are likely to last for a long time. My argument was that there are structural changes going on, which might not come as a surprise, but the end results might well be.
What are these changes? In a nutshell: the centerpiece of the argument hinges on pension funds increasingly being viewed as financial intermediaries. Pooling assets, performing asset transformation, acting as a delegated monitor. A clearer focus on the asset transformation then introduces risk management, which will be far more explicit in the years to come. After all, a pension fund knowlingly generates risks, and expects to be rewarded for it, but this implies that the design of risk management, its link to the goals, and the allocation of results due to generating these risks (to the sponsor, participants, pension fund) is somewhat of a higher priority than investment management. Which leads to the delegated monitoring function. Pension funds who have a clearer focus on what they want, and what the risks are, should be able to manage their investment managers more strictly, shifting the balance from the suppliers to the buyers (which is a good thing).

The devil is in the detail though. If a pension fund goes through all these motions, the end result might well be that it looks like, acts like and talks like a financial organization. Paradoxically, participants increasingly lose faith in the financial sector, as surveys indicate. This poses a dilemma, which is not unsolvable though. Trustees could acknowledge that their organisation should be run as a financial organisation, but definitely is not one, and make this visible in the way the investment are run, requiring trustees to speak out, and say what they do or do not like, with the preferences of the participants in mind. Think about debates like active and passive management, costs, long term investing, these are the kind of debates that ultimately determine whether a pension fund will be confused with an asset manager, or invests on behalf of its participants.