(May 9, 2012) — Public pensions should install “a risk policy (or equivalent) that defines fund risks along with measures and processes,” according to the National Conference of Public Employees Retirement Systems (NCPERS), one of America’s leading public pension plan organizations.
This is among the multiple recommendations made by NCPERS regarding best-in-class governance structures at American public pension plans.
While American public plan governance has long been labeled sub-par relative to international peers, NCPERS is “encourage[ing] fiduciaries who have not done so to consider adopting the following practices with the understanding that flexibility in implementation is one hallmark of effective governance.” These practices include:
1. “Whether it is in electronic or paper form, a fund should adopt a governance manual that serves as a central repository for the fund’s primary governance documents.” This document, according to NCPERS should include “summaries of statutes, regulations, the plan document and board practices; The systems’ mission statement… [and] the organization chart, lines of authority, job descriptions and summaries of contracts.”
2. A pension fund should establish, document and adhere to a set of practices that have a proven impact on performance and risk oversight.” Recommended practices include “development of a strategic plan or equivalent that guides the fund towards its goals; adoption of a fiduciary education program to continuously improve fiduciaries’ skill sets; [and] asset allocation studies to identify asset mixes for meeting future financial needs.”
3. “Reports to the board should include a set of key performance and risk measures to help the board assess the fund’s progress toward goals across actuarial, administrative, audit, compliance and investment functions.” According to NCPERS, measurements given should include “the funded ratio as measured by the ratio of fund assets to fund liabilities; Net annualized investment returns relative to the return assumption and benchmarks; Future benefits owed to members as measured by the actuarial accrued liability; [and] net assets available for benefits and changes thereto as reported in the annual audit.”
4. Governance has been at the forefront of the public pension debate as of late-not least because of recent problems with placement agents. Notably, the California Public Employees’ Retirement System (CalPERS) adopted governance reforms in late 2011 in an effort to increase transparency and accountability following a review of its relationship with placement agents.”Over the last 15 or so years, the use of placement agents became somewhat common in the world of private equity and real estate investments, and was not limited to those money managers seeking investments from public pension funds,” CalPERS stated in a March 2011 internal review that led to the reforms. “Where public monies were involved, however, the use of placement agents at times gave rise to various ‘pay to play’ schemes run by well-connected ‘insiders’ and their patrons in government service, as has now been widely reported in the press.” The reforms imposed included:
1. Each Board Member to sign a statement acknowledging their fiduciary responsibilities in conjunction with fiduciary training and self-assessment processes.
2. An independent third party to assess Board performance once every two years.
3. New roles and responsibilities for the Board President, Vice President, Committee Chairs and Vice-Chairs.
4. A new powers reserved structure for the Board and its committees that outlines responsible parties for approvals, standards of conduct, strategy, policy and performance.
5. Certification of a “no undue influence” document to be signed by all senior executives and investment officers.
6. Adoption of a new confidentiality policy that will assist in guiding Board conduct.