How NCPERS Accredited Fiduciary (NAF) Program Helps Public Pensions Advance Good Governance Practices
By Lizzy Lees, NCPERS
Nearly ten years ago, the NCPERS Accredited Fiduciary (NAF) program was created to educate public pension trustees and administrators about best practices for plan governance, oversight, and administration.
We spoke with NAF instructors Peter Landers and Brad Kelly of Global Governance Advisors (GGA) about how the program was developed, who should attend, and key issues public pensions should watch in the coming years. The spring class of NAF will be held on May 20-21 in conjunction with NCPERS Annual Conference & Exhibition in New Orleans. Reserve your spot today—registration closes on May 5.
Q: NCPERS Accredited Fiduciary (NAF) program started nearly 10 years ago. How did this program come to be?
Brad Kelly: Public pressure on pensions is not something new, but it has been escalating, so a lot of pensions found themselves with significant headline risk. And with politicians who didn't want to carry the liability going forward, it became very easy to point to trustees and say, ‘the whole reason why we're in the situation is not because we as a community took a 10- or 15-year copayment holiday, but because we have billions of dollars that are being overseen by teachers and firefighters and police officers and state troopers.' And that, of course, couldn't be further from the truth.
So NCPERS realized that a lot of their members were under this unprecedented pressure and criticism. They reached out to GGA to see what we could do to help protect these trustees and the representative nature of these pensions. We collectively agreed that it was governance. The capabilities of these trustees would be kind of that frontline form of defense—the more capable they are in their role, the less they can be criticized. And that's where we came up with the NCPERS Accredited Fiduciary program, with the four modules and the specific content that we have today.
Peter Landers: Adding to that, NCPERS had done a great job for many years with the Trustee Educational Seminar (TEDS) program, but it was very much geared towards newer trustees on public pension fund boards. There was a gap, though, for those more experienced board members—which is where the Accredited Fiduciary program comes in nicely. It's really about going one step further in trustee education. It also provides that added level of assurance to stakeholders that these trustees are taking their job seriously, they're getting necessary training, and they're even earning their Accredited Fiduciary designation.
Q: What makes NAF unique, and why do you think trustees and pension staff should consider attending?
Peter: One of the things that makes NAF unique is the ability to network with other trustees from across the country and hear about their experiences. We run several case studies through each of the modules, so you get a chance to understand different perspectives from your fellow trustees.
NAF is also where both trustees and administrators can gain an understanding of best practices and start to think outside the box. We have a specific challenge at the end of module four where we identify alternative pension fund models with different ways of cutting costs, adding benefits, gaining those increased investment returns, etc. You really don't get that from the traditional training out there.
Brad: We strongly encourage all participants to share their stories. It's important for them to share their successes—and how they realized those successes—but it's equally important to share their horror stories. So often, these funds are working in isolation. We strongly advocate that they work together to start finding ways to decrease their operating costs.
One thing that we've found is that a lot of funds really benefit from going beyond just the trustee level. Because the senior executives have to work in lockstep with the board, it often is very beneficial for the trustees to attend NAF alongside the head administrators. Then everyone's hearing the same message about what the true role of the board is and how management should be working to support them. If you can delineate the responsibilities in a very clear way, it allows both management and the board to work much more efficiently and effectively as a cohesive group.
We always say that part of the challenge is that good board members don't know what they don't know. But after going through NAF, they understand their true fiduciary duty and a thorough understanding of best practices. Good board members ask good questions.
Q: The NAF program is currently made up of four modules: Governance and the Board's Role; Investment, Finance and Accounting; Legal Risk Management and Communication; and Human Capital. Can you provide an overview of what each of these modules covers?
Peter: Module one, Governance and the Board's Role, really gets into board governance in terms of best practices, the makeup of your board, and the typical committees that are set up. We review what roles the board plays, including when trustees should be ‘in the weeds' versus focusing on policy and strategy. We talk about the roles that different individuals play and what responsibilities they should be in charge of. And then we finish off that module with a discussion on board performance, including how performance should be measured and assessed.
The second module, Investment & Finance, is taught by investment experts from Meketa. They talk about things like asset allocation and making sure you have a solid investment philosophy that you've agreed upon as a board and with your management team. Attendees learn about the use of external advisors and how to utilize them to get the best value add. They cover things like ESG, including the financial reporting and disclosure aspects of it. And they also focus on alternative investing and what to be aware of when selecting between different managers.
During module three, Legal, Risk Management & Communication, we have experts speak to some of the legal fiduciary duties of the role of a trustee. This includes things like how to limit your liabilities and fiduciary insurance. We review the different priorities from an audit perspective and what the Audit Committee's role is. And we also talk about the different types of risks and what different funds can do to try to mitigate those risks. We also cover strategies for effective communication, both as a board and for individual trustees. This includes things like who are the right individuals to speak on behalf of the fund, what role trustees play in public communication, and the importance of speaking as one voice and as one board.
Module four, Human Capital, starts off by focusing on the importance of succession planning. We cover short- and long-term succession planning, employment contracts, and executive evaluations. We discuss measuring the performance of your fund and staff members. Then we look at executive and trustee compensation, including what are the components of a good compensation philosophy, how to benchmark compensation effectively, and even how to advocate for yourself with things like education budgets. And finally, we highlight different alternative pension management models and challenge attendees to consider ways to create better efficiencies, cut costs, and maybe gain some added investment return opportunities.
Q: Do the educational needs for public pension boards differ from private sector pensions or corporate boards? If so, how?
Peter: I would say yes and no. There are some foundational elements in terms of good governance practices, but what the board should be focusing on versus what management should be focusing on are almost universal.
There are some differences, though. One area public pension boards need to focus on more than most private sector boards is the investment side of the equation, because of course, public pension funds are investing members assets. The traditional 60/40 split is no longer generating the returns that these pension funds need, so there's the need to diversify into private equity, real estate, and other alternative assets. So for public pension board members, there can be a learning curve to get up-to-speed on the investment side of things. But overall, a lot of the key tenets of board governance are universal.
Brad: I would add that that public pressure aspect is something that is considerably greater for a public pension trustee and public pension board, as opposed to a private sector organization. They're under a lot more scrutiny, so they need to know how to properly mitigate that headline risk and also understand how to work with their stakeholders and community members.
Q: What are the top three issues public pension boards and staff should be keeping an eye on in the next few years?
Brad: One of the biggest things we're trying to advocate is that public pensions in today's market are not public agencies any longer, especially when they're trying to bring investment capabilities in house to cut ongoing operating costs. But it's a philosophical change where they have to see themselves as an investment entity, because the public agencies have different compensation structures and abilities to incentivize. If you're trying to bring in investment professionals from out of state or from the private sector, you have to be competitive. But the savings associated with in-house investment professionals can be significant, and pensions are starting to realize that.
Money management fees are usually the number one operating expense for public pensions that aren't internalizing their investment capability. But as pensions are bringing more and more talent in house, they need make sure they're offering competitive compensation and being strategic so that they can get the right people in the right seats to properly safeguard the pension promises that they've made.
Peter: Adding onto that, I think, you know, the craziness of the markets just means it's more important than ever to work with your internal team or external consultants to make sure that you're comfortable with your asset allocation. Making sure that you have a diversified portfolio will hopefully allow you to weather out any of the volatility in the next few years. Part of that, though, is making sure boards and staff have the education needed to ask those good questions around asset allocation.
Advocating for proper education budgets—both for trustees and staff—is also key, because there is a cost to poor governance and added benefits that come from good governance. And we're talking between 30-100 basis points that can be saved or lost through governance practices, which can become very sizable numbers.
The world is evolving, so in addition to an increased focus on investments going forward, how you operate your pension fund board is key. Boards are going to have to make sure that they're setting themselves up properly to ensure they can weather out any temporary blips in the markets, and really, again, promote that long-term sustainability of their funds.
Brad: Throughout the NAF program, we remind attendees that this is a long game approach so they shouldn't be responding with knee jerk reactions. They need to ensure their investing strategy is sound and solid, and that they're adhering to it. There's some minor tweaking, but they're not going to make major changes within a six- to 12-month period. They're in it for that 10- to 30-year lifespan, and those are the time horizons they need to focus on.
Learn more about NAF and register for an upcoming class here.