Politics can take toll on public pension professionals

For a private-sector professional joining a public pension plan as a CIO, high-ranking executive or trustee, the initial experience can be a shock.

"The political effect is omnipresent," said Fredrick "Rick" Funston, managing partner and CEO at Bloomfield Hills, Mich.-based Funston Advisory Services LLC, which provides governance and risk solutions for public pension funds. "They aren't really aware of it until they are in (the job)," he said, noting that a public pension fiduciary's job requires a lot more than making investments.

Mr. Funston recommends that public pension plan clients hire independent fiduciary counsel for advice, conduct continuing education on fiduciary duties and seek advice from independent consultants.

"Trustees have a duty to stay informed," Mr. Funston said. "There has to be open communications between the pension system and legislators."

Noting the "fishbowl" nature of public pension funds, "being closer to the public eye is not for everyone," said Keith Brainard, the Georgetown, Texas-based research director at the National Association of State Retirement Administrators. "The political noise is always going to be out there." Mr. Brainard said he doubted a departing pension professional would openly complain about politics.

The fishbowl existence can take its toll on public plan veterans as well as relative newcomers, said Dan Cummings, executive vice president and managing director of Denver-based executive search firm EFL Associates. Politics has "played a factor" in the departure of some CIOs and other public pension executives, he said.

"The noise just wears them down," he added. " You have to be politically savvy."

Mr. Cummings, who declined to discuss clients, said private-sector financial executives who seek public pension plan jobs see it "as a calling – a way to give back" to help police, teachers and other public employees build and protect their pensions.

When conducting a public-sector executive search, Mr. Cummings quizzes potential applicants about being in the "glass house of the public sector." Are they willing to deal with politicians and the media? Are they willing to deal with the bureaucracy? Can they focus on more than direct investing in the markets?

"Some people are knowledgeable about the public sector," he added. "Some thrive on the politics. They're good at it."

Lawrence Schloss, who made the move to public sector CIO from the private sector – and back again – spent 45 months as the CIO of the five pension funds within the $239.5 billion New York City Retirement Systems.

"It was the right time of my life," said Mr. Schloss, who directed the bureau of asset management, the unit in the city comptroller's office responsible for pension system investments. "I was recruited for the job."

He resigned in October 2013 during the waning months of John Liu's term as comptroller. Mr. Liu, also the fiduciary for the five pension funds, didn't seek re-election for a second term, choosing instead to make a bid for the Democratic nomination for mayor.

"I never appreciated what public service does until I got there," said Mr. Schloss, now senior adviser to Marathon Asset Management and vice chairman of the New York Police and Fire Widows' and Children's Benefit Fund.

"The teachers, the subway people, the police, the firefighters: they make the place work," he said. "I was always very proud when I got on the subway that I was managing their pensions."

Mr. Schloss' encounter with the politics of public pensions was different than most other CIOs. The comptroller never interfered with his work, but Mr. Schloss had to deal with the unique nature of the city pension system.

Although he was CIO, Mr. Schloss's investing strategy was subject to varying opinions of the five city pension funds.

Each has its own bylaws and its own investment policy statement. Each has a separate board, many of whom are employees – teachers, police, fire, public employees, board of education members. A varying number of politicians serve on the boards. Each board has a different investment strategy.

For example, after the Sandy Hook Elementary School Shooting in Newtown, Conn., in late 2012, the boards representing the teachers, board of education and public employee pension funds called for divesting investments in gun manufacturers, which the bureau of asset management completed. The boards of the police and fire department pension funds said divesting "wasn't right for them," Mr. Schloss said.

Although politicians serve four or eight years, "the pension responsibility never changes and the trustees' duty never changes," he said.

Mr. Schloss also offered advice to prospective public pension executives. "The politics impacts your daily agenda," he said. "The investors who show up thinking they will be spending all their time doing investments will be disappointed." His public pension experience "was the most complicated and the most interesting job," he added. "And it really matters."