National Conference on Public Employee Retirement Systems

The Voice for Public Pensions


Guide to Pension Governance and Oversight Best Practices

Good governance is important to public retirement systems because it enables improved performance and management of risk across a system's administrative, investment, operational and member service functions. Learn more in NCPERS guide to Best Governance Practices for Public Retirement Systems. 
By: Lizzy Lees, NCPERS

NCPERS recently released its revised Best Governance Practices for Public Retirement Systems. The guide, developed in collaboration with Segal Marco Advisors, provides an overview of governance and risk management practices for pension funds to consider. The guide also features a model risk management framework. 

We spoke with contributing author, Julian Regan of Segal Marco Advisors, to discuss the key takeaways.

What are the basic definitions of governance and risk?

Julian Regan: Governance and risk are abstract, so it's important to define them first. Governance may be defined as the structures and relationships that drive organizational performance and the system by which organizations are directed and managed. Corporate governance, as distinct from fund governance, is externally focused on public companies, while fund governance is internal.
Risk may be defined as the chance of something happening that will impact an organization's ability to achieve its objectives. By breaking risk into distinct categories - operational, market, credit and asset/liability risk, a fund can more effectively measure and manage risk toward the end of reducing the probability and severity of losses. A board's tolerance for each risk type is typically included in key governance documents such as the investment policy, which sets thresholds for acceptable market risk (among other things).
Reputation risk is the risk that an organization's brand will be diminished. As evidenced by past pay-to-play scandals, compliance failures (a type of operational risk) are the leading cause of reputation risk. All things being equal, a strong reputation will help a fund gain support from stakeholders to address funding challenges and protect benefits.

Why is good governance important for public retirement systems?

Regan: Good governance is important to public retirement systems because it enables improved performance and management of risk across a system's administrative, investment, operational and member service functions. Research has found that effective governance may improve long-term investment returns by 1% or more annually.

Beyond investments, best practices such as board self-evaluations, fiduciary training, and risk assessments drive performance across strategic oversight, administrative, member service and compliance functions. 

In addition, retirement systems today face emerging risks, including new risks embedded in alternative investments, operational risks, cybersecurity risk, not to mention reputational risk. Management of these risks requires a comprehensive framework for reducing the probability and severity of loss comprised of policies, risk assessments and key measures, all of which are tools under a well-organized governance and risk management framework.     

Typically, what does a pension fund's governance structure look like?

Regan: A pension fund's governance structure is typically comprised of its board, executive management, functional staff, and contracted service providers. Within this structure and under the fund's statutory framework, the board sets strategy, approves implementation plans and oversees performance, risk, and cost-effectiveness.

The board delegates specialized functions such as actuarial studies, asset management, asset liability modeling, benefits administration and auditing to internal staff and contracted service providers.

The fund functions within a framework that is comprised of statutes, rulings, agreements, policies, and contracts that regulate system operations. Risk oversight is a key responsibility of the board. In the post-financial crisis environment, managing reputation risk is an increasingly important responsibility for public funds.

What are some of the best governance practices for public retirement systems to consider?

Regan: NCPERS Best Governance Practices are comprised of recommendations in seven areas including governance manuals, board practices, board policies, risk oversight, strategic planning, key performance and risk measures, and stakeholder communications.
  • Governance manual: 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. A well-designed governance manual facilitates effective management and provides a tool to educate trustees and stakeholders on fund operations.
  • Board practices: A retirement system should establish, document, and adhere to a set of practices that have a proven impact on performance and risk oversight. Some of these practices are mandatory (e.g. actuarial valuations), while others may be optional. Key practices include development of a strategic (multi-year) plan, board evaluations, adoption of a fiduciary education program, actuarial valuations, asset-liability modeling (ALM) studies, establishment of a program of audits and assessments, and adoption of a corporate governance and proxy voting approach.
  • Board policies: A fund should adopt and adhere to a set of policies designed to guide system operations toward the achievement of stated goals within established risk tolerances. While their form may vary, a board's key policies and procedures should include: standards of conduct for fiduciaries, a communications policy, an investment policy, procurement guidelines, a privacy policy, whistleblower policy, and a risk management policy or equivalent.             
  • Risk oversight: A fund should adopt a risk management framework and document it in a risk policy or within other policy documents (e.g. investment policy, privacy policy). The board should delegate accountability for management of market, credit, operational, asset / liability, liquidity and other risks through job descriptions, contracts, and charters.
  • Strategic planning: A fund should adopt a strategic planning approach either in the form of a multi-year plan or within other documents. Strategic planning is a hallmark of successful organizations. It provides the board with a mechanism to map out long-term goals along with the implementation steps necessary to achieve them.  
  • Key performance and risk measures: 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. Given their expansive duties, boards rely on efficient reporting to enable effective oversight.
  • Stakeholder communications: A fund should communicate regularly with members and other stakeholders through multiple media including website notifications, publications, letters, and required reports. Communications provide transparency into fund operations and may increase member satisfaction, while strengthening the fund's reputation.

What should pension funds keep in mind when developing (or updating) a governance policy or other policy?

Regan: When updating an investment policy, risk management policy, governance policy or any equivalent document, pension funds should bear in mind any changes that have occurred in accountabilities under the governance structure (e.g. have any roles or responsibilities been added?), changes in the legal and or regulatory environment that governs plan operations (e.g.  new statutes), changes in risk exposures and any new goals (e.g. earnings assumption), guidelines (e.g. asset allocation targets) or risk thresholds the board has approved.

Funds should also avoid common pitfalls in developing policies that may include, for example, documenting unrealistic, aspirational goals in a policy (this can create more risk) or developing overly complex policies that staff members and service providers who are responsible for adherence may find difficult understand. In updating a policy, the pension fund, with the assistance of fund counsel, may review whether narrative may be improved in form to avoid excessive content, which can discourage plan professionals from understanding it. Finally, in updating a policy, it is important to ensure that guidelines are not overly rigid to the point of taking discretion from experts who are compensated to exercise it.

What resources are available to public pension funds to develop a risk management framework?

Regan: In addition to resources that are available directly through NCPERS, including the Model Risk Management Framework that is an addendum to NCPERS Best Governance Practices, the following resources are available.    
  • An investment consultant, counsel, actuary, auditor, and key staff, all of whom possess expertise to varying degrees in risk management and who may be able to draft a policy.
  • Dedicated risk management and governance consultants who may be part of a dedicated practice within an actuarial, investment consulting, auditing or law firm.        
  • Publicly available risk management policies and frameworks that may be accessed on public company websites, public pension system websites or websites of regulators.
  • Sample documents that may be available on industry organization websites.
  • Studies and surveys that focus on fund governance in part or in full include NCPERS Annual Public Retirement Systems Study, with a particular focus on oversight trends. 
  • Academic studies and research papers that may include sample provisions.                   
It is important to note that most, if not all public pension systems already have the components of a risk management framework in place through their board and committee structures, charters, policies, contracts agreements, and documented procedures and reporting requirements. The key is to organize these components so that they can be continuously improved upon.

What are the practical alternatives for implementing best practices for modest size public funds that do not have the same resources as large state retirement systems?

Regan: Small and mid-size public retirement systems can implement governance best practices, but their approach may look slightly different than large plans due to varying staff sizes, budgets, and available resources.  For practical reasons, implementation may take different forms and may be achieved through greater delegation of duties to contracted service providers and outside experts than is the case with larger retirement systems. In addition, the scope and form of implementation may differ for modest sized systems. For example, while it may not be practical for a modest sized system to develop a dedicated risk management policy as a standalone document, the system can achieve the same outcome by embedding components or the risk management policy or framework in the investment policy, committee charter, contracts, and other documents (this is often the case).        

What is the difference between corporate governance and public retirement system governance?   

Regan: Corporate governance differs from retirement system governance in that it refers to the structures and relationships that drive the performance of publicly traded companies. In the corporate world, the board of directors who are elected by shareholders, including public pension funds, is the foremost governance structure. While public pension funds seek to influence the quality of corporate governance through proxy voting and shareholder engagement, corporate governance is external to the retirement system.

Public retirement system governance refers to the structures and relationships that drive public fund performance, so it is internally focused. The foremost governance structure of a public retirement system is typically the board of trustees. This is one reason that board practices and policies are key components of NCPERS Best Governance Practices.  

What are some of the governance-related challenges public pension funds face?

Regan: Public pension funds face several governance-related challenges, including market volatility, changing risk exposures, pressure on funded ratios, and reputational risk.  
  • Market volatility: Market risk events such as volatility during the 2007–2009 financial system crisis that contributed to a meltdown that at one point eliminated $4 trillion from pension funds worldwide, steep losses in the first quarter of 2020 during COVID-19 and,   volatility related to Federal Reserve interest rate hikes and inflation in 2022 highlight the challenges pension funds face in maintaining a return stream to help stabilize benefits and contribution levels.                          
  • Changing risk environment: Public funds face new challenges from market volatility related to computer trading, new types of market, operational and liquidity risks from alternative investments, cybersecurity risks, as well as environmental, social, and governance risks that require a new and expanded framework for managing risk.          
  • Pressure on funding levels: While public pension funded ratios improved to 77.8% in 2022 according to NCPERS study, pressure remains on public funds to make up for lost time to reach 100% funding, while state and local governments face pressure in funding required contributions. In the face of this pressure, disciplined decision making enabled by a well-designed investment policy is an essential tool in helping public funds.   
  • Reputational risk: Managing reputation risk is an increasingly important challenge for public funds. Despite their record of excellence in investments, operations and compliance, public retirement systems face risks to their reputation. Effective governance may strengthen a retirement system's reputation among key stakeholders.   
  • Succession planning: For any organization, the departure of key executive and functional staff who possess technical skill, operational and compliance knowledge can undermine the continuity of high-quality investment, administrative and member service functions and lead to the risk of loss. Succession planning and a long-term strategic plan can mitigate these risks, which may be heightened with an aging workforce.            

What are some of the governance-related opportunities for public pension funds?

Regan: Public retirement systems can implement leading edge governance practices and concepts, outlined below. These can provide the opportunity to better manage market volatility while effectively measuring and managing risk exposures in a manner that sets them on a path to full funding and strengthen public funds' reputations among key stakeholder groups.     
  • Enterprise risk management (ERM): According to NCPERS' 2024 study, 24% of respondents have implemented an ERM framework. ERM is a concept that organizations employ to, among other things, eliminate silos that have traditionally existed in management of risk across functions with the goal of providing the board and management with improved transparency and enabling risk-adjusted decision-making across the enterprise.   
  • Enhanced reporting: Enabled by technology, innovation, data aggregation and key risk measures, public funds are increasingly giving their boards additional transparency into risk and performance in a manner that enables insight into how results were achieved and a basis for corrective action, where needed.
  • Chief risk officer role: For larger retirement systems who possess the resources to do so, the creation of a chief risk officer role presents another opportunity to centralize responsibility for managing and reporting on risk toward the end of giving the board greater transparency. One 2010 report cited a study that found that 89% of institutional investors reported creating a CRO role in the aftermath of the 2007 – 2009 financial system crisis.                  
  • Risk assessment: Public funds and their service providers have introduced new tools including market risk stress testing, stochastic modeling, deterministic modeling, liquidity tier analysis, technology risk assessments and internal control audits to position plans to achieve their objectives in these key areas.
  • Corporate governance and proxy voting: According to one study, public pension funds and their corporate counterparts owned 17% of U.S. public equities. As large institutional owners, public funds have taken a proactive stewardship to vote their proxies on governance issues such corporate board structure, executive compensation, risk management policies to improve corporate performance toward the end of enhancing shareholder value for the benefit of participants.                                      

Julian Regan is the Public Sector Market Leader and a Senior Vice President in Segal Marco Advisors' Boston office. Previously, he served as Executive Director of the New York State Deferred Compensation Board, Vice President, Risk Governance and Strategy for Fidelity Investments, and Assistant General Manager and Budget Director, Massachusetts Bay Transportation Authority.



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