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Strong Strategic Plans Are the Foundation for Good Governance
By: Brad Kelly and Peter Landers, Global Governance Advisors LLC
Pension funds should make strategic planning a priority, as it is essential for strong and effective governance and oversight of the fund. Effective governance helps in securing the pension promise and retirement security for plan participants.
This is an excerpt from NCPERS Fall 2024 issue of PERSist.Pension funds should make strategic planning a priority, as it is essential for strong and effective governance and oversight of the fund. Effective governance helps in securing the pension promise and retirement security for plan participants.
Public pension funds are complex organizations that ensure financial security for millions of retired public sector employees and require careful management and oversight to remain effective and sustainable. When delivering the NCPERS Accredited Fiduciary program, we often note that one of the foundational and most effective ways to enhance governance in pension systems is to implement a long-term strategic plan, because it provides a comprehensive framework that guides decision-making, improves transparency, and strengthens long-term sustainability.
A well-defined long-term strategic plan sets clear objectives and performance metrics for pension funds. By establishing specific goals and benchmarks, plans create a standard against which the performance of the fund can be tracked and measured. This transparency helps stakeholders, including beneficiaries, active members, employers, and taxpayers, understand how the fund is managed and assess its effectiveness. Enhanced accountability and transparency are fundamental to building and maintaining public trust in the pension system.
Public pension funds are overseen by boards that can change over time. Long-term strategic plans provide a stable framework that ensures consistency in decision-making, regardless of changes in leadership or management. Strategic plans outline funds' long-term goals and the expected objective benchmarks required to achieve them, which helps guide new members and maintain a collective focus and continuity. Naturally, market and political conditions fluctuate over time, and set plans reduce the risk of short-term, reactionary decisions that could jeopardize fund stability and sustainability.
Long-term strategic planning involves identifying potential risks and developing strategies to mitigate them. Public pension funds are exposed to a host of risks, including market volatility, demographic changes, and regulatory shifts. Good strategic plans include risk management objectives and diversified investment practices that help withstand economic downturns and other adverse conditions. By preparing for potential challenges, public pensions enhance their resilience and ability to maintain their long-term obligations to their members.
A key component of long-term strategic planning is the alignment of investment strategies with the fund's long-term obligations. This ensures that investment decisions are made with a focus on sustainable growth and risk management. Strategic plans provide guidelines for asset allocation, diversification, and investment horizon, promoting disciplined and prudent investment practices. By prioritizing long-term returns over short-term gains, funds achieve better financial outcomes and reduce the likelihood of funding shortfalls.
Effective governance requires open communication and engagement with stakeholders. Long-term strategic plans include communication strategies that keep stakeholders informed about fund performance, challenges, and strategic direction. Regular updates and transparent reporting foster trust and collaboration between fund management and stakeholders and engaged stakeholders are more likely to support fund initiatives and contribute to its success.
Pensions must navigate a complex landscape of legal and regulatory requirements. Long-term strategic plans incorporate compliance frameworks that ensure adherence to relevant laws and regulations. This proactive approach helps avoid legal issues and ensures that the fund operates within the bounds of its governing legislation. By maintaining compliance, public pension funds can focus on their priorities and primary mission of providing secure retirement benefits.
Strategic planning enhances the effectiveness of pension boards. A clear strategic plan provides a roadmap for the board, outlining priorities, goals, and key performance indicators. This enables the board to perform its oversight role more effectively, monitor progress, and hold management accountable. Well-informed and engaged boards are better equipped to make decisions that align with their funds' long-term interests.
Long-term strategic planning is foundational for good pension governance. It promotes accountability, consistency, and resilience, ensuring that pensions meet their obligations to members. Aligning investments with long-term goals, facilitating strong risk mitigation and stakeholder engagement, and ensuring legal compliance, strategic plans enhance the overall effectiveness and stability of public pension systems. In an environment of increasing complexity and uncertainty, long-term strategic planning is not just beneficial -- it is essential for the successful governance and oversight of public pensions.
Bios: 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) 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.
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