Saturday, September 30, 2006

More aggressive pension funds?

nrpn has a good story about pension funds having to become more assertive in pursuing their fiduciary duty towards their members, even if that means joining class actions, which are so despised in Europe, against firms they're invested in. Often times, this is the most effective means to bring about changes in corporate governance.

ECB calls for Pensions Treaty

In an unprecedented move for an institution whose independence is so vital to its cause as it is in the case of a central bank, Mr Lorenzo Bini Smaghi, member of the Executive Board of the European Central Bank has called for legal constraints on democratic institutions to ensure the intergenerationally sustainable funding of pensions systems in Europe. The call comes with a succinct analysis of the poor performance of democratic institutions with regards to intertemporal distribution, using the examples of inflation, where the cure is independent central banks, and public debt, where it is the Maastricht Treaty. The objective of such a Pensions Treaty would be to "link in a quasi automatic way benefits and the retirement age to contributions and to the average life expectancy, so as to prevent one generation from being paid its pension by the next generation, with benefits that the latter generation could not itself hope to enjoy".

This important speech is another proof that the fictitious generation treaty has been introduced and broken at the same time by the present generation, and it proposes an interesting and perhaps workable solution, which will probably also require an independent Pensions Authority to supervise the implementation of the Pensions Treaty. It is however very courageous and uncharacteristic of the ECB to take on this contentious issue.

Friday, September 29, 2006

XBRL article in CFA Magazine

After this week's important SEC announcement, there is no more doubt as to whether XBRL is an established standard for financial reporting. Following our article in Professional Investor, the CFA Centre for Financial Market Integrity is voicing its official support for XBRL in an article in the latest edition of the CFA Magazine.

Tuesday, September 26, 2006

IFRS from an analyst's perspective

By popular request, here are the slides from my presentation (now complete with notes) about the Financial Analyst's perspective on Financial Reporting Standards which I gave this morning at the World Standard Setters' Meeting in London.

I've also made a recording of the introduction by Warren McGregor, my presentation and the subsequent Q&A session. Unfortunately the questions are not very easily understood, and the recording cuts off after an hour. But it works pretty well for being recorded on a simple mobile phone.

Monday, September 25, 2006

SEC to Rebuild Public Disclosure System

Wow! The US SEC is rebuilding its public disclosure system entirely based on XBRL, thus "paving the way for universal XBRL filings by companies". This in effect is just short of announcing that once the three announced contracts have been completed, the SEC will introduce mandatory disclosure based via XBRL. More about this on

Thursday, September 21, 2006

Accounting precepts

These are the 11 Precepts of the IASB and the FASB, which I've picked up during a recent meeting. They are very reasonable and appear applicable beyond accounting.
  • Concentrate on converging and fixing what's broken.
  • Reason from "first principles".
  • Don't confuse concepts with conventions.
  • Focus on the underlying real-world economic phenomena.
  • Weigh alternatives comprehensively and evenhandedly.
  • Press naysayers for better alternatives.
  • Be clear what the concepts mean - and don't mean.
  • Resist the temptation to "peek ahead".
  • Remember the consequences of diverging.
  • Acknowledge that changing thinking will take time.
  • Don't "Paper Over" Real Differences.
  • Monday, September 18, 2006

    150 years of volatility

    Researchers at the Bank for International Settlements have come up with 150 years of financial market volatility history of stock and bond returns for Australia, Canada, France, Germany, Italy, Japan, UK and the US, starting in 1850 to 2005. Their main conclusions are of interest to investors with a long investment horizon such as pension funds:
  • First, volatility is dominated by large, temporary increases that appear correlated with episodes of economic weakness, political instability and financial turmoil.
  • Second, volatility has been much higher from the 1970s onwards than it was previously. This finding appears surprisingly robust across countries and financial instruments. Seeking to explain it would be an important topic for future research.
  • Third, the movements in volatility that have been observed in recent years are small from a historical perspective. These findings suggest that financial institutions and policymakers alike would be well advised to note that a sharp increase in volatility from the level observed in the last few years would not be unprecedented.
  • An inconsistency between bullet points 2 and 3 is only apparent in so far as volatilities have risen considerably above their long term historical averages since 1970, but have come off their peak levels in recent years, which suggests that a rekindling might not at all be out of the question.

    Sunday, September 17, 2006

    Pensions reform extremely urgent

    This is the assessment of Jean-Claude Trichet, President of the European Central Bank, in an interview with L'Espresso. This assessment is important because despite of the problem's long time horizon, we're dealing with a compound interest issue, which renders an early solution implicitly less expensive than a later one.

    Friday, September 15, 2006

    Pension (asset) pooling

    Dpn has an excellent story about pension asset pooling which looks into how to achieve pooling efficiency gains without going all the way to a pan-European pension fund (i.e. pension pooling). Based on the results of Deloitte & Touche's 2005 Pension Pooling Survey for Multinationals, the article addresses different approaches to asset pooling as well as available vehicles and issues, such as fiscal transparency and the complexities of Double Taxation Treaties. Finally, it looks at case studies with Shell, Unilever & Suez-Tractabel. Good stuff!

    Tuesday, September 12, 2006

    Commodities in Pensions

    NRPN has an good story about pension funds' investments in commodities. It displays the strategic benefits of the asset class, but also questions the timing of entering the asset class at this point, given its recent bull run.

    Monday, September 11, 2006

    XBRL news

    Professional Investor has printed a review article about XBRL, written by Mike Willis and myself. Feedback is very welcome!

    Furthermore, here is a presentation I used recently. Thanks to XBRL Europe for sharing it!

    Monday, September 04, 2006

    Dynamic investment strategies [CH]

    The recently published study Dynamic Investment Strategies for Swiss Pension Funds by the Swiss Institute of Banking and Finance at my alma mater has caused a bit of a stir in the Swiss media. But naturally, the stir does not come from the study's main tenets - it's far too technical for that - but rather from some marginal comments which hit an environment rife with discontent about pension funds' investment behaviour.

    Materially, the study assesses alternatives to the current common practice of buy and hold strategies. There is quite enough material for disagreement not to have to take recourse to marginal political squabbles. My main points of critique are the following:
  • The expected annual growth rate of the funding ratio is the key variable studied. The model pension fund's liabilities are a key component of this ratio. Yet, the model never revalues the liabilities during the whole simulation period of ten years, despite of changes in the discount rate. Starting from an initial value, the fund's liabilities are simply bearing the technical interest rate. This is not just a model simplification, it is a critical omission. If the model were corrected for that factor, the shapes of the central charts probably have to be modified, which might easily change the conclusions of the study.
  • Leveraged Constant Proportion Portfolio Insurance (CPPI) is one of the strategies recommended. This strategy implies that the fund uses leverage, probably in the form of a loan. Strategic borrowing is not permissible for pension funds, though.
  • Another strategy uses long straddles without mentioning that there cannot be net leverage without recourse to art. 59 BVV 2.

  • P.S. The authors comment offline that they assumed a constant technical interest rate and a closed fund. Unfortunately the assumption about the technical rate was tacit.

    Sunday, September 03, 2006

    BIS on fair value

    Great timing! The Bank for International Settlements (BIS) has just published a series of four papers on fair value accounting:
  • 208: Including estimates of the future in today's financial statements
  • 209: Fair value accounting for financial instruments: some implications for bank regulation
  • 210: Institution-specific value
  • 211: Do accounting changes affect the economic behaviour of financial firms?

  • Why is this great timing, you may wonder? Well, it is very useful material for my upcoming presentation at the World Standard Setters Meeting in London on 26 September.

    Pension deficits: up & down

    What I wouldn't find myself on Mercer's website, Google did for us: Here is Mercer HR's recent summary report about top UK and European companies' pension exposures and trends as at 30 June. The charts & findings are interesting, but I am not entirely convinced about information consistency, what with this being rather novel concepts for many of the preparers.

    IAS 19: new draft interpretation

    On 24 August, the International Financial Reporting Interpretations Committee (IFRIC) has released a draft interpretation of IAS 19 for public comment until 31 October. To quote from the IASB's website: The proposals clarify how to determine in normal circumstances the limit on the asset that an employer’s balance sheet may contain in respect of its pension plan as well as how the pensions asset or liability may be affected when there is a statutory or contractual minimum fu nding requirement.

    As Swiss pension schemes are subject to statutory minimum funding requirements, this new IFRIC interpretation should come under close scrutiny in Switzerland.