In this era of corporate reform, it's important some pension funds scrutinize their own operations.
The problems at the New York City Retirement Systems and the New Jersey Division of Investment are examples of what can be uncovered. Both were subjects of recent, separate critical reports by Independent Fiduciary Services Inc., which made valuable suggestions to improve the two systems.
The New York City system, among other problems, "doesn't have a written investment policy statement, or associated governance documents, for each of the five pension funds it covers," according to a Pensions & Investments story. Importantly, the lack of an investment policy hurts the operations of the fund in terms of investment objectives, risk tolerance and performance accountability.
The system has been active as a shareholder in criticizing corporate governance of corporations. Yet, the system's own governance deficiency diminishes its credibility in addressing corporate reforms.
At New Jersey, a major problem is that it cannot legally hire external managers. Such exclusive internal management is unique among state pension funds, according to the report.
No prudent investment policy should have such a restriction. The study pointed out the restriction harms investment performance. The approach also has limited the division's investment diversification. It has no real estate or alternative investments, managing only conventional publicly traded stocks and bonds. But even in equities, the division lacks a diversified program; it has no indexed funds.
New York City Comptroller William C. Thompson and New Jersey Treasurer John McCormac deserve partial credit for commissioning the studies to identify issues that need addressing.
Both studies should have been done long ago. Without doubt other pension funds need to conduct similar reviews. But praise for New York and New Jersey officials should be withheld until it's clear how strongly they pursue, to the extent they have the authority, the adoption of reforms mentioned in the studies.
What have the trustees — the fiduciaries — of these pension funds been doing? They have been part of the problem. In New York City, for example, the trustees carried on without an overall investment policy and without documenting performance benchmarks in a policy statement, among other oversights. In New Jersey, fiduciaries have been complacent on the use of external managers. They should have actively sought legislation to lift the prohibition. Does anyone think the division of investment manages money better than any other asset advisory firm in the country — or the world?
New Jersey legislators and the governor ought to enact whatever measures are necessary to enable the investment division to hire external investment mangers. They also should end any investment restrictions.