Pension funds must play their part in driving down the costs of deploying long-term capital, a matter that is reducing the return on investment, according to Keith Ambachtsheer.

In the latest Ambachtsheer letter, the director emeritus of the Rotman International Centre for Pension Management extolled the virtue of long-term investing, noting that if humanity had been unable to take a long-term view, it “would still be in subsistence societies of hunters and gatherers”.

He said that, even now, there was still “better tomorrows” to be had for those investing for the long term.

“But now we live in far more complex societies that suffer from ‘principal/agent’ problems in all three of its important functional dimensions: political, commercial and financial,” he said. 

Ambachtsheer said a “rough estimate” was that such agency problems were lowering long-term returns by 1.5% per annum and questioned how these foregone returns would be captured.

“Institutional investors around the globe, led by the pension fund sector, are well-placed to play a ‘lead wagon’ fiduciary role in driving those agency costs down by focusing the capital at their disposal on the long term,” he said.

The academic said such an approach would both “foster good citizenship” and boost returns for long-term investors.

In a survey conducted for the Rotman Institute, covering 81 pension fund chief executives with assets of CAD4trn (€2.2trn), respondents noted that external managers were “not really aligned with [an investor’s long-term] investing aspirations”.

“While our organisation is ‘on board’ with LT investing conceptually, we are struggling to build a new monitoring and guidance framework,” a second respondent added.

A third added that “material” regulatory constraints were holding back its attempts to be long-term investors.

The view is shared by the Institutional Investors Group on Climate Change, which has called for a stable regulatory framework to foster long-term investment, including capital commitments to the energy market.

“The not-so-good news is that the governance functions of pension organisations are generally still not at the quality level they should be, and there is still a material aspiration/implementation gap in the design and management of long-horizon investment programs,” Ambachtsheer said.

Referring to the work in his letter and an upcoming academic paper on the topic, he added: “The silver lining is that neither of these challenges can be addressed without their being first clearly defined and understood.”

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