Dick Kamp: Risk management and the meta-level

November 19, 2024

By Dick Kamp, Director Pension, Investment & Risk at Milliman Pension

In a recent conversation with ‘people in the field’, existential concerns were raised about the survival of the second pension pillar. This shocked me. My first reaction was one of denial: this could not just be an issue! After all, as part of the establishment responsible for implementing the second pillar, the idea that the second pillar would no longer exist is completely beyond my imagination. But is that justified?

In an earlier article, I wrote about how the social contract between pension scheme members and pension administrators is being rewritten. Simply put, the social contract means that if pension administrators provide pension benefits that (somewhat) maintain purchasing power in the benefit phase, participants will continue to pay contributions and pension administrators will continue to exist.

The discussions now taking place within the pension industry on the idea behind and the design of the new pension contract are fierce. Sometimes it is argued that the current system is superior to the new one. And sometimes it is about details in the design of the scheme itself. Apparently, these discussions also seep through to outside the industry. And in the context of ‘there's no smoke without fire’, this leads to unrest among participants.

In this article, I want to stay away from the matter and draw attention to the concept of ‘meta’. At least, my interpretation of that term. For me, ‘meta’ means above or beyond. It means that when considering something, you take a step up and thereby try to get a view of the whole. That may sound a bit vague. I will try to explain it in more detail.

Perhaps a somewhat strange metaphor: everyone knows the matryoshka dolls. In such a puppet, a smaller puppet is hidden. The reverse is also true. A smaller puppet is surrounded by a larger one. So it is with an issue or a discussion. If there is a discussion on an issue, that issue is part of a larger issue. And that in turn part of a larger issue.

Why is this relevant? It is relevant because the content of the solution of a smaller issue, or the process followed to arrive at the solution of a smaller issue, sometimes has implications for the bigger picture, of which the smaller issue is a part.

To make it concrete to pension funds, the participant is actually always at the centre. In a technical discussion and battle of directions on, say, investing, it is good to take a step back. You can then say: ‘Right now, we're not getting anywhere.’ What do we actually want to achieve at a higher level and what does that mean for the participant? Can we get a common picture of this? And from that perspective, let's take another fresh look at the issue. What renewed insight does that give us?

Back to the example at the beginning. The objectives of the new pension contract include future-proofing and better resilience to inflation risk. However, the way in which the discussions are currently being conducted in the sector seem to lead to the very opposite: undermining the social pension contract. What is needed? One step back, an overarching view and then determine from here what the actual problem is and how it can then be addressed.

Is this a universal fact? I think so. Hence there is a word for it: meta. I think it is always good to take a step back when you are involved in a discussion and a hardening of views seems to be taking place. And this can also happen at the board table. It is then advisable to take one step back. To ask the question: ‘What is the subject of the conversation part of? Is there a bigger picture? Is it relevant to the content of the discussion? Is it relevant for the process we are following and for having this discussion?'

What is the advantage of using the term ‘meta’? I think the advantage is that the solution to a problem can often be found in considering the bigger picture. The other advantage lies in the fact that the process of finding or discussing solutions leads to a more efficient, effective whole with a better outward perception. Ultimately, that leads to better decision-making.

So when discussing the new pension contract, for instance the design of investment policy in the benefit phase in relation to inflation risk, let us think about the bigger picture. There is a common interest for a durable second pillar. Let's conduct the discussions in such a way that there is more participant trust rather than distrust.

And when dealing with (this and other) issues on the board table, is there an understanding of the bigger picture of which the issue at hand is part? And how does that translate into substantive treatment and process treatment?

Dear board member, do you ever experience that a discussion just seems to stall? And do you then take one step back to consider the bigger picture with the participant at the centre?

This is the thirty-third column in a series on risk management. The series aims to encourage readers to consider risk management as an integral part of running a pension fund.

More columns by Dick Kamp