iDKA

"Yes, this is The Lanesborough. Connecting You."

Last Thursday evening, I was sitting in the Library Bar at the exquisite Lanesborough Hotel in Knightsbridge listening to my good friend Paul McGill expounding on the key cultural differences between the English and Americans on the one hand, and the French and Germans on the other.

As he reached the crux of his compelling argument, a chap on the other side of the bar glanced up from whatever he was reading.  Our eyes met briefly and in that half second it was obvious, to me at least, that he was weighing up the merits of McGill’s feverishly impassioned discourse.

All normal stuff. Except, perhaps, that the chap’s face was completely covered with finely drawn lines of decorative black paint on bright orange foundation and he was wearing a seriously imposing Native American head dress and a long black robe with beautifully carved ivory ornaments attached. The Lanesborough Library Bar being what it is, a bastion of cultured, quintessentially English restraint and polite indifference, people drifted past without so much as a raised eyebrow.

McGill and I, however, have an insatiable curiosity that leads us to question most things. So, unable to restrain ourselves we introduce ourselves to the exotic gentleman and it turns out that he is none other than Chief Yawanawa from the Amazonian Rain Forests, relaxing in the Lanesborough Library Bar after an afternoon with Prince Charles and a trip to Trafalgar Square. As you do.

Those of you with an interest in such things will know of course that Trafalgar Square is currently hosting the Ghost Forest Project – a collection of ten behemoth tree stumps (complete with roots) from a sustainable Ghanaian rain forest.

It’s all about raising awareness about climate change and the Ghost Forest is now making its way to Copenhagen in time for next week’s eponymous conference.

Well, this is starting to get a bit interesting because ten days ago I got an email from my old Ghanaian chum, Tutu Agyare, inviting me to the Ghost Forest Project which, he explained, had been organised by Angela Palmer, the wife of an ex colleague at UBS, the investment bank. Since I am half Ghanaian and grew up not far from one such rain forest, I stuck it in my diary.

And then a week ago, I got a text from my colleague and friend Anthony Simpson, (uber-connector extraordinaire) also inviting me to the rainforest on Thursday to meet (you guessed it) Chief Yawanawa and Angela Palmer. Many apologies, I said, but I’m at the Lanesborough on Thursday evening.

Well, the evening is off to a cracking start and after bidding a fond farewell to Chief Yawanawa in the Library Bar, McGill and I make our way across the sumptuous Lanesborough lobby and through to The Belgravia for dinner.

 

As chance would have it, The Right Honourable Mr Michael Portillo also happens to be dining in the Lanesborough’s Belgravia last Thursday evening and before long McGill and I are engaged in deep and meaningful conversation with him. Mr Portillo is a thoroughly pleasant and super-knowledgeable bloke and we discuss pretty much everything from the Spanish Civil War and the impact of rising inflation on defined benefit pension plans to bankers’ bonuses and the curious election of the Belgian chap and the lady from St Albans who are now going to be running Europe from a caravan.

Now I may not have mentioned this, but McGill is incorrigibly gregarious and irrepressibly convivial and soon he is introducing his new best friend Mr Portillo to advertising global supremo Sir Martin Sorrell (“Michael, Martin – Martin, Michael”) who is also having dinner at the Lanesborough. Seems they are longstanding acquaintances but McGill wasn’t to know that.

(Now there is, I freely admit, far too much gratuitous name dropping in this piece and at this juncture I should probably plead the tried and trusted defence of “justification”. In other words, I’m trying to make a point and without all the blurb above, it would be much more difficult, so bear with me.)

As I finally get ready to leave, I bump into Geoff Cutmore the excellent anchor on CNBC Squawk Box Europe and we have a long chat about the challenges of rising at 03:00 and still being up for dinner at 22:00. McGill wants to know if Cutmore gets recognised in the street and Geoff says yes but not as much as in Switzerland where he is a household name for reasons that are not entirely clear to him.

As I step out into the chill Knightsbridge night, Anthony Simpson calls to say it was a shame I missed meeting the Amazonian Chief Yawanawa at the Trafalgar Square gig. I inform him that on the contrary, I have had the pleasure of a beer or two in CY’s illustrious company.

 So life is full of connections and one or two tiny degrees of separation. Which is why Chief Yawanawa, Angela Palmer, Geoff Cutmore, Michael Portillo, Martin Sorrell, Tutu Agyare, Anthony Simpson and Paul McGill are all linked to the Lanesborough last Thursday evening.

And as we connect better and better, technology now plays a crucial facilitating role and here are some thoughts. Tutu’s email and Anthony’s text both arrived on my iPhone. My picture with The Right Honourable Mr P and Chief Yawanawa got taken on my iPhone and the news about the Belgian guy came through on my Sky News App on my iPhone while we were having dinner that evening. I checked Friday’s weather on my iPhone, took Anthony’s call and, while I was about it, checked the location of the nearest cash machine. On my iPhone.

This isn’t an Ode to the iPhone, but when you consider what that tiny piece of kit can deliver in terms of up-to-the-minute information and multi channel hyper-connectivity, and when you ponder what else might be possible as social media technology steps up to the next level and changes the connecting game, you begin to realize that maybe, incredibly, we are still just paddling in the shallows. Splashing like children in the surf.

There are three hundred and fifty million (!) people on Facebook with half a million new joiners every day; 50 million people on LinkedIn and goodness only knows how many on Twitter.

The thing about the web is that it brings like minded people together, it provides answers to your questions, it sorts vast amounts of information in a nanosecond (and then homes in on exactly what you want) and it turns everything into a conversation.

But that’s not all. It does it on a scale that is beyond anything we have ever witnessed. We now have the ability to connect and to interact with anyone, anywhere, anytime. The only limits are the constraints of our imaginations.

Well, this week in our own small way, we are adding to the rich and highly pixillated tapestry of digital connectivity. Yes, we’re launching mallowstreet.com, bringing pension funds and solutions providers together online and in one place! A virtual Lanesborough, if you will…

 

Comments (3)

Posted 7 days ago by Dawid Konotey-Ahulu 

The British Soldier...

The average British soldier is 19 years old.....he is a short haired, well built lad who, under normal circumstances is considered by society as half man, half boy.  Not yet dry behind the ears and just old enough to buy a round of drinks but old enough to die for his country - and for you.   He's not particularly keen on hard work but he'd rather be grafting in Afghanistan than unemployed in the UK.  He recently left comprehensive school where he was probably an average student, played some form of sport, drove a ten year old rust bucket, and knew a girl that either broke up with him when he left, or swore to be waiting when he returns home.  He moves easily to rock and roll or hip-hop or to the rattle of a 7.62mm machine gun.     He is about a stone lighter than when he left home because he is working or fighting from dawn to dusk and well beyond.  He has trouble spelling, so letter writing is a pain for him, but he can strip a rifle in 25 seconds and reassemble it in the dark.  He can recite every detail of a machine gun or grenade launcher and use either effectively if he has to.  He digs trenches and toilets without the aid of machines and can apply first aid like a professional paramedic.  He can march until he is told to stop, or stay dead still until he is told to move.     He obeys orders instantly and without hesitation but he is not without a rebellious spirit or a sense of personal dignity.  He is confidently self-sufficient.  He has two sets of uniform with him: he washes one and wears the other.  He keeps his water bottle full and his feet dry.  He sometimes forgets to brush his teeth, but never forgets to clean his rifle.  He can cook his own meals, mend his own clothes and fix his own hurts.  If you are thirsty, he'll share his water with you; if you are hungry, his food is your food.  He'll even share his life-saving ammunition with you in the heat of a firefight if you run low.  He has learned to use his hands like weapons and regards his weapon as an extension of his own hands.  He can save your life or he can take it, because that is his job - it's what a soldier does.  He often works twice as long and hard as a civilian, draws half the pay and has nowhere to spend it, and can still find black ironic humour in it all.  There's an old saying in the British Army: 'If you can't take a joke, you shouldn't have joined!'     He has seen more suffering and death than he should have in his short lifetime.  He has wept in public and in private, for friends who have fallen in combat and he is unashamed to show it or admit it.  He feels every bugle note of the 'Last Post' or 'Sunset' vibrate through his body while standing rigidly to attention.  He's not afraid to 'Bollock' anyone who shows disrespect when the Regimental Colours are on display or the National Anthem is played; yet in an odd twist, he would defend anyone's right to be an individual.  Just as with generations of young people before him, he is paying the price for our freedom.  Clean shaven and baby faced he may be, but be prepared to defend yourself if you treat him like a kid.  He is the latest in a long thin line of British Fighting Men that have kept this country free for hundreds of years.  He asks for nothing from us except our respect, friendship and understanding.  We may not like what he does, but sometimes he doesn't like it either - he just has it to do.  Remember him always, for he has earned our respect and admiration with his blood.  And now we even have brave young women putting themselves in harm's way, doing their part in this tradition of going to war when our nation's politicians call on us to do so.   They are doing their bit.....please do yours by forwarding this to someone else.

 

Comments (0)

Posted 22 days ago by Dawid Konotey-Ahulu 

Elephant in the Room, Tiger in the Long Grass

Pension plans have taken a hard knock over the last 18 months. They were not prepared for the onslaught of Hurricane Crunch, and the aftermath is miserable to witness. Funding levels as low as 50% are being reported i.e., the plan only has half the assets needed to pay out all the pension benefits. Half! That’s what you call a disaster.

We’ve already talked about the ticking demographic time bomb in which people who don’t get their pensions in around 20 years from now (some plans won’t have enough assets) will be forced to rely for support on their children - who in turn will be under the burden of trying to support themselves and their own children. Be warned - the freight train coming into the tunnel doesn’t even have its lights on!

So this blog is where we start to look at what happened as the dark storm swept in during those early months of 2007. Why, for example, did even those funds that thought they had battened down the hatches, find their contents swept out to sea?

Well, (no surprise) it’s a long and complicated story; here’s the first part:

Back in sunny 2006, pension plans and their corporate sponsors broke bread together and agreed to try and manage the plan assets and liabilities in a more sophisticated and properly thought-out manner. At last, there was general acceptance that falling long term interest rates and rising inflation expectations were an insidious and lethal combination for defined benefit pension plans.

As an aside, it’s worth noting that way back in 2003 when FRS17 was first introduced, a common view was that the problem facing pension plans was posed mainly by volatile equities, rather than interest rates and inflation. In fact, some advisers positively militated against hedging those risks – “unnecessary”, “a diversion” and “too expensive” was how they described it.

I know this because I was one of several investment bankers who strongly advocated full and complete hedging and sat in meeting after meeting shedding tears of frustration as a long and distinguished line of all powerful investment consultants handed out contrary advice week in, week out. Check out the board minutes – it’s all there.

For what it’s worth, I reckon that systemic failure to understand the twin threat posed by falling rates and rising inflation expectations and the consequent failure to hedge against them was probably the single greatest cause of today’s problems. It cost pension plans a huge amount of money between 2003 and 2006. Why? Because interest rates fell steadily and long term inflation rose, which dramatically increased the present value of the liabilities. The plans’ assets simply could not keep pace. For some plans, that cost was measurable in the hundreds of millions if not more.

Today we’re starting to pick up the tab. Companies are posting big losses, not because the operating business has failed, but because the company has had to inject a large amount into the pension plan.

There are some popular myths doing the rounds that go like this: “the sponsor hasn’t paid enough money into the plan and that’s why the deficit is so big”; or, it’s entirely due to assets falling in value.”  Well, those factors may have contributed to the problem but they’re missing the real issue: the truth is that the liabilities weren’t hedged and they should have been. Perhaps this is not the time or place to pin down the various reasons and excuses, but that’s the elephant in the room.

Anyway, by 2006 pension plans and their advisers began to get to grips with the fact that it was essential to hedge against falling rates and rising inflation. There were many opportunities to insure against those risks but many plans still made a Big Bet that they did not need to hedge all the risk (“how bad can it get?” / “it’s a long term thing” / “it will all get better with time”).

Well, things didn’t get better. They got much, much worse. By mid 2007, pension plans were battling a wholesale deterioration in assets and the liabilities were spiralling upwards out of control. The Crunch had arrived, it was more brutal than expected and the Big Bet went badly awry.

To make matters worse, some of those plans that did try to reduce risk by hedging the liabilities, simultaneously invested in an asset class that subsequently blew itself to bits: Asset Backed Securities (ABS).

Over the last 18 months these ABS bad boys have earned themselves (in my book at least) the dubious sobriquet of “most misunderstood asset class including equities in recent history”.

At least with the equity market, every one knows it’s a fickle, risky, now you see it / now you don’t, place to put your money. But ABS was mistaken for a cuddly pet pussy cat that was bound to reward investors with “cash plus a bit” in return for little or no downside risk. Not so! Those asset backed securities turned out to be more Bengal-Tiger-hiding-in-the-long-grass than cuddly kitty, and all the pension plans that clasped the seductively purring kittens to their bosom got comprehensively mauled by the man eating jungle cats.

More recent vintages of ABS (particularly under the control of a specialist manager) have completed rehab and now go a long way towards restoring confidence, but that won't help those who got involved three years ago and unknowingly invested heavily in the US sub-prime market believing it to be the same as the Hali.

ABS probably needs a blog of its own. Then we’ll get back to the main event. More coming up…

Comment (1)

Posted 28 days ago by Dawid Konotey-Ahulu 

A Pensions Crisis, Simon Cowell and Mother Teresa.

In my last blog about pension plans I said that Governance 1.0 was broken. Before I have a crack at what Governance 2.0 might involve, we’re going to look at some background info that you should know.

Exactly nine years ago, the guys who make the accounting rules for companies (the Accounting Standards Board (ASB)) came up with a radical new proposal – FRED20. It was the stuff of revolution - the accounting equivalent of scrapping the pound or driving on the right or forcing Members of Parliament to pay their own mortgages.

In the next couple of blogs, I am going to give you the lowdown on how the landscape has changed for pension plans over the last nine years and how only a small minority appear to have realized that if the rules get completely changed, you need to play the game a completely different way.

And, from 2003, a pension plan had to hold enough assets to pay off all the liabilities. Seems fair enough, you say. Not so fast. The ASB pushed the envelope and totally changed the rules . I’m talking about seriously radical stuff. The pension plan liabilities, (those amounts that the pension plan's actuary reasonably believes it will have to pay to pensioners in the future) get treated, in effect, as though they are payable IMMEDIATELY. That's right. Now! Today!

A couple of things happened therefore back in those early days as a result of FRS17. First, the assets shrunk a size or two. The new methodology, it turned out, was merciless. It made Simon Cowell look like Mother Teresa. FRS17 just told the story like it was. So if someone would only pay you £78 for your assets, you couldn’t “smooth” them up to £105. They were worth £78. And, simultaneously, viewed through the FRS17 lens, the liabilities were typically much larger. The plan could no longer assume its equities would inevitably bail it out come hell or high water.

The plan had to get real and assume a more level headed rate of return – comparable, in fact, to the borrowing rate of a decent, AA rated company. This was nothing like as high as the traditional (equities based) rate of return previously used. The reduced discount rate dramatically jacked up  the upfront amount required to pay the liabilities and that amount became the official size of the pension obligation recorded on the corporate sponsor’s balance sheet.

Second, the newly created Pension Regulator (TPR) declared that in line with the provisions of the UK Pensions Act 2004 he would step in to enforce that debt.  Boy, did that really hurt! Because guess what? Pension plans worked out that they were in effect lending that deficit amount to the company on great terms. And so they began to ask for repayment of the loan, pronto.

Frankly, this was greeted pretty much universally with outraged incredulity by corporate sponsors. I know, because, at the time, I talked to a hundred CFOs  and Finance Directors. The mere discussion of THE DEFICIT drove most of them to incandescent apoplexy. They simply couldn’t bring themselves to accept the stark reality that the ASB had, overnight, slapped a gargantuan and highly volatile debt onto their collective balance sheets. Throughout 2003 most of them went into denial, ignored FRS17, and prayed for dawn.  It never arrived.

You can understand their angst. I mean, you set up a fabulously generous pension scheme for your hard working employees, making substantial payments on their behalf into the plan year after year. The staff, hopefully, is loyal and grateful in return. It’s a beautiful thing for all concerned. And then, out of nowhere, the ASB conjures up a massive black hole in your balance sheet and TPR forces you come up with a plan to fund it with millions of pounds you had ear-marked for badly needed capital expenditure. What the …??

Well, by 2005 and into 2006, as TPR began to turn the thumbscrews, most companies bit the bullet and began making extra contributions in return for the Trustees’ agreement to start managing the plan’s risks by doing something sensible with the assets, namely, matching them to liabilities. Remember, this was a whole new concept. Pension plans tentatively engaged with “Liability Driven Investing” (LDI) and diversified their investments.

But then in 2007 a chill and bitter wind howled in from the west and wreaked the kind of destruction that is beyond the stuff of nightmares. To their lasting regret, pension plans were unprepared. They simply hadn’t improved their “governance” to the level required to face the impending storm. When the big bad wolf blew, the house of sticks just fell down.

Next blog we’ll talk about what happened to pension plans in 2008 when the asset world turned to dust and ashes and the liabilities soared skywards. I have seen Trustees gently weep and I cannot say I am surprised.

Comments (0)

Posted 1 month ago by Dawid Konotey-Ahulu 

If it's broke, fix it

It’s bleak stuff and enough to make you weep. Whatever way you cut it, defined benefit pension plans are in a miserable state: massively underfunded and with no clear industry-wide game plan for recovery.

How ironic! With all the accumulated expertise and technology available today at the push of a button, you would have thought that things would be in better shape. When Apollo 11 landed on the moon in 1969 it sported less computing power than your mobile phone does today. And so it is in every industry. Airlines, pharmaceuticals, automobiles are all 100 times more sophisticated and safer than they were even a few years ago. 

Why is it, then, that the pensions industry appears to be in the worst shape ever? Just at the point at which it has become clear that people are going to live for many years longer than previously thought, there is not enough money in the till to pay them all out.

So pension plans are shutting left, right and centre to new and existing members. It’s the nuclear option but their corporate sponsors have done the calcs and they don’t like what they see.

I’m not aiming to add to the stress, but the simple truth is, without substantial external assistance, some pension plans may find that their assets will run out before future pensioners have been paid their pensions in full or, in extremis, at all. If that happens, then sometime around, say, 2030, many elderly people will become financially heavily dependent on their children, who in turn will struggle to support themselves along with their parents and their own children. Nightmare. And it’s probably coming to someone near you unless things change radically.

I’m talking about “governance”. It may sound like one of those supremely dull words you can safely ignore, but it’s not. Governance is what is going to determine whether, as a pensioner, you will get paid what’s due to you 20 years from now. It is the decision-making framework pension plans rely on to decide where, when and how to invest the plan’s assets for your long term benefit.

The current governance framework (let’s call it “Governance 1.0”) is flawed for many reasons and it’s a major factor in explaining why we are where we are. In summary, the pensions landscape has changed beyond recognition in the last few years and governance just hasn’t kept pace.

We’ll talk about Governance 1.0 in my next blog, and I’ll share some background info you should probably know.

Comments (0)

Posted 2 months ago by Dawid Konotey-Ahulu 

Social Media and Finance - The New Frontier. Five Points Every Guru Needs to Know!

I was in a meeting last week with three investment bankers, an asset manager and a commercial lawyer. After we had dealt with the business stuff, the conversation morphed to networking and then social media. Amazingly, not one of them had more than a very basic understanding of where it is at right now. Sure, they had all heard of Twitter, but none of them uses it. Facebook, they said, was for teenage kids. Blogs were for geeks and Silicon Valley. In all other walks of life, these are super-sophisticated guys. Between them they move billions of dollars around and they all earn serious money for their efforts.

That conversation proved something I’ve been thinking for a while. There’s a communications revolution happening as we speak. Some people are right in the middle of it and are Masters of the Social Media Universe (you may be one of them) while others are completely oblivious as it unfolds around them. (To be honest, I myself only really got involved earlier this year.)

And, uniquely perhaps, your social status, professional qualifications and earnings capacity has nothing to do with determining how involved you can be with this particular innovation. It’s close to being free.

Social Networking is basically about, well, networking. It allows you to have a thousand subscribers to your blogs, a million followers of your tweets and much more beside. So just imagine if that potential were to be harnessed on an industrial scale by the world’s major industries: basic materials; conglomerates; consumer goods; financials; health care; industrial goods; services; technology or utilities.  If, instead of allowing it to pass them by, these gigantic industries got down and involved. For now, I’m concerned with one particular sector: “financials” and, within that, pension plans.

Social Networking is imminently set to introduce significant improvements for the many groups of individuals who are responsible for several trillion dollars in pension plan assets across the globe and YOU can participate in the revolution.

If you have wisdom to impart in this space, read on because there is a real and present opportunity for Social Networking gurus to become thought leaders as pension plans move rapidly to get digitally educated and as they urgently seek help getting up a super-steep curve.

Here’s what I’m talking about in five points:

1.   Social Networking is here to stay but Finance Industry doesn’t get it – yet!

Social Networking is ripping up and re-drawing the map of our personal and business relationships. It’s the New Reality and, love it or loathe it, we’re all affected by the arrival of this network of instant connectivity and exponential viral reach.

Ironically, one group still paddling in the shallows is the global finance industry. It will tell you that it’s joined up, that it’s connected. But it isn’t. Not even close. A few domestic US banks understand it, but many leading financial institutions still ban their staff from accessing Twitter and Wordpress. Whatever the merits of that stance, it speaks for itself. Despite the astronomic sums the industry as a whole spends on technology every year, it remains dismally plodding behind the digital curve and held back by obsolete legacy systems.

The pension plan industry in particular has miles yet to travel along this highway, but the good news is that it will shortly undergo one of the most radical technological upgrades in its history and this time it has nothing to do with regulation, accounting changes, rating agencies or market forces.

2.   Pension Plans – They Need Community Like Never Before

Here’s the Story Board. Pension plans are controlled by Trustees. Following the seismic shock triggered by Lehman and the rest, all Trustees today find themselves required to read, analyze and then act on a ton of complex financial material relating to their plan. It’s not easy. Trustees are not usually market professionals and yet they have to make major decisions which will affect the plan members for generations to come. Get it wrong, and the repercussions will be felt long after they have left the scene. This is pulse-quickening stuff that’ll keep you from a good night’s sleep.

The heart of the problem is that many pension plans are tied to an operating framework that makes it hard to make well informed decisions. Don’t misunderstand me, there are some excellent pension plan Trustees who make consistently well-judged decisions. But, by and large, pension plans are hampered by clunky and inflexible legacy set-ups and few of them have access to all the answers they seek.

Social Networking is about to change that in a massive way.

3.    “Isolated on a Desert Island”

That’s how Anna describes her feelings about her job as a Trustee on a multi-billion dollar pension plan as she and her fellow Trustees struggle to make strategic decisions in relation to managing pension assets and liabilities for the present and future retirees of a global pharmaceutical corporation.

She says:

We rarely get to learn from other pension plans about how we could do our job better. We’re on our own in the most difficult market conditions.

Often, Anna and her team have to take enormous decisions of a type that they know has already been taken by similar-sized pension plans of other drug manufacturers. Such as how to negotiate an external contribution schedule and a recovery plan. Or how to work out how much investment risk the plan should be taking. Or how much return it should be seeking from its assets. 

Anna would love to discuss her keep-awake-at-night issues with Trustees of other plans who have already jumped through these contorted hoops and made it all work.

Frankly she would be happy just to hear their key lessons learned. But she can’t. The system isn’t set up for that. Sure, she can have the occasional useful conversation here and there, but for the most part there are “thick walls” between her plan and the others she’d like to reach. She feels isolated.

The plan’s advisors are helpful but it’s not the same as talking to other folk in her shoes. She is sure that there has to be a better way. If you thinking I’m exaggerating, check with a pension plan Trustee. My job is to advise pension plans and I hear this all the time.

4.   Here Comes Everybody!

It’s all about to change. Trustees en masse are soon to discover that in this new and instant digital age, Social Networking platforms blow these “walls” away in a cloud of analogue smoke and dust. The power of Twitter, LinkedIn, Facebook or Flickr is that they strip away traditional, artificial and unnecessary boundaries and establish vibrant communities much faster and more efficiently than even their creators imagined!

Clay Shirky’s highly readable book “Here Comes Everybody” describes the breathtaking rise and rise of connected online communities. He talks compellingly about the inevitable slow- burn demise of exclusive, old-school, traditional journalism. As if by way of proof, the very fact that you are reading my thoughts and connecting with me here in London from your beach hut in Bora Bora or conference in Los Angeles shows that the bar to publication has been lowered to sea level. The only thing that really determines whether you read this is how much you care.

Guy Kawasaki makes the point that social media today is equivalent to the internet back in 1994. We haven’t even begun to harness a fraction of its real potential. When pension plans and other major life-affecting industries get involved we may just find that we ain’t seen nothin’ yet.

In his book, “The Wisdom of Crowds:  Why the Many Are Smarter Than the Few”, James Surowiecki explains how a diverse and intelligent group of individuals can come to stunningly accurate conclusions if they work together. In fact, they will usually do better than any single person could. Provide a platform and the crowd will find the answer. That’s empowering!

5.   Social Networking – The Killer App !

In the next few months, Social Networking will come to this powerful but as yet unconnected industry. As it begins to tip (and it will), you are going to see an explosion of demand for best in class advice and guidance in #social #media space as they realize what they can achieve.

If you need more convincing, think about this: a relatively tiny number of Trustees control a vast reservoir of pension plan assets. In the UK alone, these Trustees control over US$2 trillion across public and private plans. That’s just here in the North Atlantic. Globally, pension plans are responsible for tens of trillions of dollars in assets.

Even before the markets imploded last year, pension plans were in bad shape. But recent events have left them with even more serious losses as markets suffered systemic failure. Now, Trustees face Mission Close-to-Impossible as they try to nurse their broken plans back to full health. Failure is not an option.

Anna and her fellow Trustees have a ton of pressing issues they have to deal with. Social Networking will allow them to communicate across their information-starved community and find the answer in the crowd. That’s going to give them the Killer App and they’re going to embrace it with a vengeance.

Watch this space over the next few weeks as we develop this general theme and as Social Networking goes viral for the finance sector including, especially, pension plans.

Do you have a view? Then write a comment below. Tell me what your unique skill set is. I’m getting together with 100 Trustees on Thursday, Sep 24 in London to discuss some of these issues. Should we talk about you? Send me your bio and I’ll use the most interesting one. We’ll get them all to follow your blogs and tweets. Personally I’ve learnt a lot from a variety of gurus including, (just by way of example), the guys at Mashable, the Posterous team and Kevin Rose. I’m looking for more in the same league.

There’s a groundswell of support across the financial industry for this digital media revolution and, if you have something to say, you should definitely be involved. 

BTW, if you want to join us at our Trustee 100 event and you’re involved in any way with a pension plan let me know and I’ll try to get you in.

Comments (14)

Posted 2 months ago by Dawid Konotey-Ahulu 

Sing it Otis

Spent a rainy evening looking back through my archived blogs (as one does) and found this one written back at Merrill:

Sittin' on the Dock of the Bay          30 September 2005

Half a mile off-shore from Fisherman’s Wharf, San Francisco, is a small bleak island swept by a cold wind. A monstrous  hulking concrete edifice sits imposingly in the centre – Alcatraz. From 1934 to 1963 it was the most secure penal institution in the USA. Each cell is 10ft long and 3ft wide. Some men were locked up for 23 hours a day. Every day. All movement was monitored and big men with guns kept constant watch to discourage antisocial behaviour. And in the distance, the sound of a bustling city, vibrant and free. On Christmas Day, they would listen to the sound of street parties across the Bay and imagine what it must be like to eat Christmas lunch, drink brandy and smoke a Cuban cigar. Some of them were driven to the very edge of insanity.

Often they would dream of freedom, of careless warders leaving keys within easy reach. In the morning, cold harsh reality. They weren’t going anywhere. No one escaped from Alcatraz. Until 1962. Frank Morris and two accomplices achieved the impossible. Using a spoon smuggled from the canteen, they dug a tunnel through a wall of concrete, bit by bit, day by day and escaped, swimming to freedom wearing lifejackets made from plastic bottles.

For pension fund trustees and their corporate sponsors, the constraints imposed by a burgeoning deficit are akin to sitting in a very small cell. Of course, every now and again the real yield rises and the equity market fillips but then the walk in the exercise yard is over and it’s back to Cell Block D.  I’m not a trustee, but I imagine the Herculean task of keeping the assets up with the liabilities must feel a bit like using a spoon to burrow through a thick wall of concrete.

Here’s an escape plan: you’ll need to procure a map, keys, a partner, cash and a boat. 1.(The Map) - Commission a detailed analysis of the pension fund to show you where the hidden risks are. 2. (The Keys) - Ask a suitable party to come up with a strategy to hedge the risk, optimise the assets, fund the deficit and educate the various parties. 3. (The Partner) Ask an investment manager to help with best execution. 4. (The Lifejacket). Invest in a portfolio of assets that will actually offset further increases in the liabilities and keep the pension plan afloat. 5. (The Cash) Contributions from the Sponsor.

Some pension funds have already made their move and are sittin’ on the dock of the Bay, watching the tide roll away. Now it’s decision time. Join them, or stay put and listen to the street parties across the water.

Comments (0)

Posted 3 months ago by Dawid Konotey-Ahulu 

A Dog's Tale

In early 2006, I resigned from my job at Merrill Lynch running the Pension Risk Management Group and walked out of the door to build a firm that would offer practical and independent risk management advice to pension funds and insurance companies. A few weeks later I was joined by my good buddy Rob Gardner. We were armed with a bulging note pad – the dog-eared pages covered in scribbled plans - and the addresses of coffee shops  across the City that would double as our offices. In those last days before I left, I posted a blog which endeavoured to make the point that nice as it was to own a large portfolio of equities, there was some other stuff on the To Do list:

A Dog’s Tale          4 January 2006

A guy sees a sign in front of a house: “Talking Dog for Sale.” He rings the bell and the owner tells him the dog is in the backyard. The guy goes into the yard and sees a black dog just sitting there.

You talk? he asks. Sure do, the dog replies. Oh my gosh!! So, what’s your story? asks the man.

The dog looks up and says, Well, I discovered my gift of speech pretty young and I wanted to help the government, so I told the CIA about my gift and in no time they had me jetting from country to country, sitting in rooms with spies and world leaders because no one figured a dog would be eavesdropping on top secret conversations. I was one of their most valuable spies eight years running. But the jetting around really tired me out, and I knew I wasn’t getting any younger; I wanted to settle down. So I signed up for a job at the airport to do some classified undercover security work, mostly wandering near suspicious characters and listening in. I uncovered some incredible stuff and was awarded a batch of medals. Had a wife, a load of puppies and now I’m just retired.

The guy is blown away and asks the owner how much he wants for the dog. Ten Dollars says the owner.

The guy says, But this dog is amazing. Why on earth are you selling him so cheap?

‘Cause he’s a complete liar. He didn’t do any of that stuff.

A metaphor for life if ever there was. Just when you think you have found something special, it turns out to be not all that.

Take your portfolio of equities for example. UK pension fund assets made an estimated 18% overall return in 2005, representing a third consecutive year of double digit positive performance following a three year bear run at the start of the decade. Great news indeed. A very special asset class. But not special enough it would appear. Because, although the assets have gone up as requested, the liabilities have gone up as well – and by much more.

It’s a well worn theme and this is not the first time you’ve heard me bang on about it, but you need a three part ALM strategy.

First, hedge the risk of the liabilities rising further due to a falling real yield; the real yield is now below 1%. That wasn’t supposed to happen, some said, but it has and it’s falling further (0.95% this afternoon). That means liabilities are rising fast and you need to take action.

Second, reallocate the assets so that they are more diverse and (for at least part of the portfolio) return a safe but respectable spread to LIBOR.

Third, come up with a meaningful contribution schedule to fund the deficit over a time period acceptable to The Pensions Regulator.

Then you can get on with 2006.

Seeing as I have your attention, you're invited to Trustee100. See the vid (and "Orange Muffins" post below) for details:

Comments (0)

Posted 3 months ago by Dawid Konotey-Ahulu 

Orange Muffins and Chicken Pie

In 1997 I was responsible for a small derivatives desk in Singapore – of which more some other time. The only relevant information for the purpose of this blog is that at 16:00 every day I would make my humid way across Raffles Plaza to The Tea Shop on the edge of Boat Quay to order a coffee and an orange muffin with grated peel sprinkled liberally on top.  One afternoon, I strolled into the emporium and placed my order, clearly and unmistakably.  The chap on the other side of the counter looked me squarely in the eye and said ‘Would you like some chicken pie instead - only 4 Sing Dollars?’ 

‘Thanks’ I said, ‘But no. I’d prefer an orange muffin please. Chicken pie and latte doesn’t work quite as well at tea time’.

‘It really is very excellent chicken pie’, my man pressed on, ‘and you can have it for 3 Sing’.

‘Tell me’, I said, mystified, ‘Which bit of “Can I have an orange muffin?’’ sounds like “I’d really like some chicken pie?”’

‘I’ll tell you what’, he said, wholly unmoved, ‘You can have it for 2 Sing. Boss said we gotta shift it by tonight. No excuses. I’m trying to sell it to everyone.’

Wearily, I grabbed my coffee, headed for the door and never went back. Three months later The Tea Shop closed for ever and the savvy guys from Starbucks moved in.

Pension funds want orange muffins, not chicken pie and, right now, much of what they’re being offered is coming straight from the pie section.

Listening to pension plan trustees, it's plain there is a growing hunger for real change in this industry, a desire to be part of a community that embraces solutions and makes decisions quickly and effectively. 

Enough of putting up with chicken pie. The muffin’s time has come. Change can be achieved, but it will take a determined and sustained collective effort.

Trustees are ready to begin addressing these issues and the benefits of collaboration will be enormous.

I mean, imagine being part of a community in which you could talk one-on-one with other trustees at any time, ask them searching questions about transactions they’ve implemented in their own pension plans and ask them whether it all worked out, or whether they tripped up, and how and why? Or what if you could find answers to all those questions which have been bothering you for the last three years but have never really been answered to your satisfaction, no matter how hard you’ve tried?  Maybe it’s an abstract concept like negative convexity, or duration extension or value at risk that troubles you; perhaps you’re grappling with the way zero coupon inflation swaps actually work in practice, or what the mezz tranche of an ABS really does for your pension fund – if anything. And what’s a negative basis trade? Should you care?

What if you could talk to other trustees who have exactly the same questions about working out a recovery plan or understanding the technical provisions they are being asked to sign up to? What if you could ask advice from a capital markets black belt who really understands this arena and has notched up 10,000 hours trading these markets? Or, when a new idea comes winging in from an investment bank, what if you could ask the banker the questions you ought to be asking, rather than the ones he would probably prefer you to ask?

This is the stuff of community and communication and it’s time to talk seriously about the art of the possible. In fact, recently, that’s exactly what we did. We got 10 trustees to join us for a discussion about “change”. It went so well, we’re going to do it again but this time we’re inviting one hundred. You’re welcome to join us.

Here’s the invite:

Comments (0)

Posted 3 months ago by Dawid Konotey-Ahulu 

Telling It Like It Is; The New Reality

Sometime last year, I heard the chat about Twitter so, being an innovator / early adopter type, I signed up but never logged on. To be honest, I just couldn’t see the point of writing messages where I was confined to 140 characters including spaces and punctuation. A serious artist needs a wide expanse of gesso-coated canvas and this sounded more like painting on the back of a postage stamp. So, like that book I bought (99% of the exercise) but never read (1% of the exercise), I opened my obligatory Twitter account and promptly stuck it on the shelf. I didn’t follow anyone and no-one followed me.

That’s all changed. The dimly flickering candlewick has become a blindingly bright supernova and I have come up a very steep learning curve in the last two months. For those of you who have just signed up, here are some of the things I have learnt. (Frankly, this is kind of the tip of the twitberg and I’ll stick more stuff on here as time permits).

First off, when you use Twitter, you enter the world of Social Media and it’s a very different place to any world you have previously visited, with a host of new concepts and rules of engagement. If you can be bothered to nurture your relationships and update your tweets regularly, you will find yourself at the centre of something dramatic and empowering. On the other hand, if you barely glance at your Twitter messages from one week to the next, and hardly ever post any updates, you are unlikely to become one of the great thought leaders in the Twittersphere.

Of course, it may not be your burning ambition to become a great thought leader and Twitter is just fine with that. For you, it offers something different but equally powerful. You see, there are thousands of ordinary individuals out there who, between them, sift through thousands of articles, have myriad conversations with other people, and assimilate acres of information. Then they choose the best of the lot. They pore over information, distil the very best (in their own view, admittedly) and then serve it up for you on the plate that is Twitter. If you happen to follow those individuals, you have access to their condensed and distilled wisdom. In other words, Twitter aggregates relevant, useful information for you on just about every topic  - around the clock. The crucial difference between Twitter and Google, is that Twitter is unnervingly real time, in a very different way to a search engine. They’re calling Twitter the super fresh web.

A common comment most people make about Twitter is:  “Sounds like it takes up a huge amount of time and I don’t have any.” It’s a fair point, but you probably spend time on a lot of other quests which will yield you less than you would get out of a focused 30 minutes on this forum. I suggest you try it, and then decide.

Back to the thing about 140 characters (which is your limit as far as a Twitter message (Tweet) is concerned); it’s not really a limitation at all. First, it forces you to be concise – which is a good thing. Second, far and away the most popular way to use Twitter is to give some sense of your message in a few words and then finish the message with a weblink:

So, from the FT on Twitter a couple of hours ago:

“Tories would scrap FSA if elected: An incoming Conservative government would rip up Britain’s tripartite system .. http://bit.ly/S8vQS”

As I read the Twitter updates that come onto my screen every day, it strikes me that there are hundreds of participants in the pensions and insurance industry who could benefit from using social media platforms. The potential to share ideas, concerns and aspirations is enormous. But right now I don’t see many blogs from Pension Plan Trustees or from Investment Consultants or Pension Fund managers or Corporations with pension plans, and that’s a crying shame. I hear so much wisdom from that “crowd” on my travels and very little of it makes its way onto the stage.

The irony is that a blog is seriously simple to set up. It couldn’t be easier. In fact, if you subscribe to this blog you’ll automatically and immediately get your own blog created for you. Then all you have to do is write. Whatever you want; just tell it the way it is, the way you see it. Because this is the new reality; you can blog your thoughts and, as you do, you help to bring about change. If you have a message, there’s a platform to give you a voice. That’s phenomenally powerful. Because you will likely find a whole phalanx of people who feel the same way you do and who will join your chorus. Try it. There’s no better time than right now.

Here’s some great reading material around Twitter and blogging – and some people you might want to follow:

The mashable team on Twitter: The site for following the evolution of social media. All the top tips. (Try this, for starters: http://bit.ly/QF86L);

Richard Sedley on Twitter: homegrown British social media guru. Lots of stuff to get you up the curve;

Clay Shirky on Twitter: Wrote a book called “Here Comes Everybody” charting the course of, and reasons for, the explosive growth of social media;

Kevin Rose on Twitter: This guy founded digg and has a million followers on Twitter. That kind of says all you need to know;

Steven Berlin Johnson on Twitter: Wrote a story for TIME magazine all about Twitter and innovation. You should read it. Another big fish in this space;

The Posterous crew: These are the guys who make blogging ridiculously simple. Easy to understand and right up there in the SM mix. Everything you need to know about creating eye-catching and rich blogs.

Let me know when you’re set up to blog. I’ll subscribe straight away…

Comments (2)

Posted 4 months ago by Dawid Konotey-Ahulu