U.S. pension boards are under scrutiny — from fees to salaries to investment performance.
Critics frequently point to the composition of the board as a key factor in system effectiveness, while defenders point to crippling legislation or meddling politicians. The list goes on and on.
Out of those discussions, governance has become a hot topic at conferences, retirement boards and statehouses alike.
Every public pension system and trustee is unique, and only the pension system itself can determine what governance approach works best for it, sources said. However, common questions must be asked, they added.
"Fundamentally, governance is decision-making," said Rick Funston, Naples, Fla.-based partner at Funston Advisory Services LLC. "What are the key decisions? Who makes them? What intelligence and insights do (you) need to make the best decisions under the circumstances?"
"Good governance is decision-making aligned with fiduciary duties, and that means having the authority to carry (those duties) out," Mr. Funston said.
Put another way, good governance is a four-legged stool, he said. The first leg is setting the direction of the organization, followed by directing staff and prudently delegating, overseeing what has been delegated, and correcting course when needed.
When it comes to trustee selection, "you want a board that has the requisite skills and experience plus people who can think strategically," said Keith Ambachtsheer, Toronto-based director emeritus of the Rotman International Centre for Pension Management and president of KPA Advisory Services Ltd.
It's important to find trustees who focus on long-term issues, think them through and question management about the degree to which they're doing things, Mr. Ambachtsheer said.
That includes asking questions, he said, such as, "What kind of people are you hiring? Why?" In investments, "Are you insourcing or outsourcing? Why?" In audits, "Are we getting the information as an organization we need to satisfy stakeholders? What kind of information is required to do my fiduciary duty?"
In the past year, governance concerns have been raised at New Mexico Educational, Dallas Police & Fire and Kentucky Retirement Systems.
One concern at the $12 billion New Mexico Educational Retirement Board, Santa Fe, is the system's limited role in investment staff hiring and salary decisions. Currently, the state Legislature sets the headcount, and the state personnel system approves job postings, sets application criteria and gathers applications before passing candidates to the pension fund.
A bill proposed by the pension fund for the 2017 legislative session would have given the executive director the ability to hire and set the salaries of various investment staff members, including the chief investment officer, investment analysts and investment division supervisors, within ranges approved by the fund's board of trustees. The bill died in committee.
"For someone who is in the field, it's easier to assess what we need and how candidates fit into what we need," said Bob Jacksha, chief investment officer at NMERB.
The salaries for the pension fund's investment staff also lag those of other comparable state pension plans "quite severely," which has hampered investment staff retention and the fund's recruitment efforts, Mr. Jacksha said.
One of the fund's two core fixed-income portfolio managers left about a year and a half ago and it has taken that long to find a replacement, Mr. Jacksha said. Although several candidates were offered the position, they turned it down partly because the salary was not competitive, he said. Pension fund executives would like to raise investment salaries to the level of other states.
Mr. Jacksha added the current situation has "definitely constrained (the pension fund) from going any further in internal management or more sophisticated approaches."
Investment staff currently manages internally about $1 billion in fixed income, $2.2 billion in domestic equity and also makes some private market co-investments.
If changes were to be approved by the Legislature, the pension fund would expand its internal management, which could help reduce fees and produce better results, Mr. Jacksha said.
However, "the first goal here is to maintain what we're already doing," he said. Other investment positions outside of fixed income have taken a long time to fill, and the pension fund is not fully staffed, he said.
Jan Goodwin, executive director of the educational retirement board, said the board is determining its next steps.
The experience at New Mexico Educational is not unique and does raise governance concerns, sources said.
When a legislature establishes authority to set a full-time employee count, limit salaries, or restrict the ability of the system to make appropriate decisions, "it makes it difficult to hold the system and its trustees accountable," said Keith Brainard, Georgetown, Texas-based research director at the National Association of State Retirement Administrators.