Better Governance, Better Contracts

Complicated regulations, policies, and procedures inhibit good investment decisions according to Oxford and Stanford Professors.  

(June 12, 2013) – Many public funds are not able to effectively govern their relationship with their service providers, according to a paper published by Gordon Clark of Oxford University, and Stanford University’s Ashby Monk.

Clark and Monk addressed concerns about public employee systems’ (PERS) financial integrity regarding accounting standards for estimating scheme funding levels and liabilities. The study found that the governance of PERS, which can include politicians, employees and retirees, is a significant impediment to the management and performance of the funds.

“Partisan political debate can envelop nominees to plans as state and local officials jostle for attention in the lead-up to elections, (so the board) can be held hostage to local interests in ways not so obvious in private sector financial institutions,” Clark and Monk wrote.

Decisions over outsourcing services versus doing them in-house can be a flash point for these political interests, as staff salaries and benefits are under intense public scrutiny.

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The study determined that any investment decision made by US public sector pension plan is embedded in an ensemble of statutes, policies, and procedures. These requirements did not always help the financial health of the fund. The study concluded that the fundamental issues behind poor governance of pension funds are “whether local ensembles of statute, policies, and procedures allow for the formation and execution of contracts consistent with the long-term financial integrity of pension schemes.”

The authors use Oregon State’s pension fund board as a prime explain of poor structure.  New legislation in Oregon allows for the governor to appoint four of the five voting members of the board who serve at the pleasure of the governor, and according to the researchers, “the governor controls the board, whether directly or through the threat of termination.”

It is the opinion of Clark and Monk that state-mandated and local policies dominate the procedures whereby public pension funds purchase financial services and products—and this prevents the trustees from adequately executing their fiduciary duties.

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