Today’s Public Pensions Cannot Be Considered Government Agencies
By: Brad Kelly & Peter Landers, Global Governance Advisors LLC
To remain sustainable and address existing funding gaps, today's pension systems need to become competitive asset management organizations and no longer operate as government agencies.
This is an excerpt from NCPERS Summer 2023 issue of PERSist, originally published July 18, 2023.
Passive oversight and management of pension systems is clearly not working. Today, pension systems need to navigate the complex and dynamic nature of financial markets, while maintaining fiduciary responsibility to pension plan beneficiaries. To do this and address existing funding gaps, pensions need to focus on modernizing their investment strategies and capabilities; benchmark against their peers; enhance their accountability and transparency; and maintain a strategic focus on maximizing investment returns for their members while continuing to provide timely and accurate pension benefits to members.
Historically, public pensions were extensions of government entities. Hiring people with similar project management and program oversight skills, under similar human resources policies, and compensating them within similar pay ranges worked well until the 1990s. By the mid 90s and 2000s, governments started to take notice and the public grew concerned about growing unfunded pension liabilities. Pension systems that are well funded today realized years ago that to ensure their long-term sustainability, they needed to operate more like competitive asset management organizations to optimize their investment strategies, enhance investment returns and better manage operating costs.
Public pensions have an inherent responsibility to deliver stable and secure returns. By attracting and retaining investment talent and adopting a competitive asset management mindset, pensions become equipped and able to actively seek out investment opportunities that generate optimal returns. The asset management community is highly competitive and the ability to recruit and retain skilled professionals is crucial for success. By positioning themselves more as asset managers, public pensions must put in place more competitive compensation packages, implement performance-based incentives, and establish a culture of innovation and excellence. It is important to realize that this does not mean pension systems need to pay Wall Street pay levels. Pensions can leverage the mission of the organization, the sole focus on deal making (not fundraising) and other benefits of working at a pension system to help attract the professional talent they need. However, it does mean some of the pay gap does need to be narrowed and that unadjusted public sector wages will not help pension systems meet this goal. With the right talent in place, pensions can leverage the knowledge and experience of high-performing investment professionals, improve their decision-making, and deliver superior investment performance.
Furthermore, adopting a competitive mindset allows pensions to pursue diverse investment opportunities that are not readily available to traditional public agencies. Asset management organizations operate in a global and interconnected financial landscape where new investment instruments, markets, and strategies constantly emerge. Considering themselves as competitive asset management organizations allows public pensions to benchmark their activities against peers, foster healthy competition, as well as modernize investment strategies, risk management practices, and operational efficiencies. This helps improve ongoing performance and can mitigate the impact of market downturns, thus protect long-term financial health.
Viewing public pensions as competitive asset management organizations increases their focus on transparency and accountability. By subjecting themselves to industry best practices, regular reporting and rigorous oversight, pension funds build higher levels of trust and credibility with their stakeholders, including members, taxpayers, and plan sponsors.
By adopting a competitive asset management organization approach, pension systems will be able to better navigate the complexities of financial markets, deliver superior investment performance, and fulfill their fiduciary duty to plan beneficiaries. The competitive asset management model enables public pensions to position themselves at the forefront of industry best practices, leveraging innovation and technology to generate sustainable returns and secure the financial future for generations of retirees to come.
About the Authors:
Brad Kelly and Peter Landers are Partners at Global Governance Advisors (GGA) and the principal NCPERS Accredited Fiduciary (NAF) program developers and lecturers. They specialize in the strategic evaluation of corporate governance and compensation programs including board effectiveness evaluations, charter and policy development, board education, compensation philosophy executive pay alignment, performance management and incentive design. Global Governance Advisors (GGA) is a human capital consulting firm providing governance and human capital advisory services to boards of directors and senior management. The value we offer our clients stems from our unique combination of independence, experience, rigor, and integrity. This means clients receive advice that is strategic, objective and conflict-free. We bring a strategic, innovative, and practical approach to maximizing board and executive performance.