How Does U.S. Public Pension Governance Stack Up?
As many U.S. retirement and public policy experts know, state and local government retirement funds are a cornerstone of the U.S. retirement system.
By Julian Regan, SVP Public Sector Market Leader, Segal Marco Advisors, and Lizzy Lees, Director of Communications, NCPERS
In January 2023, Bloomberg published a story (“Investing Novices Are Calling the Shots for $4 Trillion at US Pensions”) on state and local government retirement systems that inaccurately and simplistically portrays the current system of U.S. public fund governance, where boards are comprised of ex-officio, union and retiree members, and appointees from the public as ineffective and leading to subpar performance.
Through effective governance, the majority of state and local plans recovered assets within six years of the Great Recession and have strengthened their long-term sustainability, according to new research from the National Institute of Retirement Security. Hardly investing novices, nearly 70 percent of pension benefits comes from investment earnings, according to the most recent NCPERS Public Retirement Systems Study.
Contrary to the article's conclusions, U.S. public retirement systems governed by members from key stakeholder groups (e.g. unions, retirees, government officials, appointees) are as likely, if not more likely, to be effectively managed than are large, aggregated funds in Canada, Holland and other countries where boards are often comprised of academics and “investment professionals” whose proximity to members and stakeholders may be remote.
In making the case for large, aggregated funds, the author overlooks several key facts regarding state and local government retirement systems, which held approximately $5.1 trillion on behalf of members and beneficiaries as of June 30, 2022:
Due to better diversification (and impacts of corporate plan de-risking), the public fund median return outperformed the corporate pension fund median returns by 1 percent over the 10-years ended June 30, 2022, returning 7.4 percent vs. 6.4 percent respectively.[i] On average, state and local government pension plans returned 8.7 percent for the 30-year period ended in December 2021.[ii]
Public funds' median returns measurably outperformed the vast majority of target date funds that are offered under 401(k) plans, which are of course managed by professionals, for the year-to-date through September 30, 2022 amid volatile markets.
While criticizing U.S. public funds' move towards greater allocations to alternatives to improve diversification, the author failed to note that Canada's largest public funds, which the author held out as models of effectiveness, maintain allocations of 16 percent and 20 percent, respectively, to private equity and real assets.[iii]
There is no question that the U.S. can learn constructive lessons from pension fund governance in Canada. Toward that end, the National Conference on Public Employee Retirement Systems (NCPERS) collaborates with our peers in Canada and includes among its members officials from the Ontario Municipal Employees Retirement System (OMERS), one of the country's largest systems.
Bloomberg omits irrefutable facts about the strong performance of most U.S. public pension funds and pension governance. As many U.S. retirement and public policy experts know, state and local government retirement funds are a cornerstone of the U.S. retirement system. They provide benefits to members and beneficiaries that enable a dignified retirement for public servants while simultaneously contributing to long-term economic growth in communities across the country.