In November, the board voted for the retirement of James H. Grossman Jr., chief investment officer, and Glen R. Grell, executive director, who are currently serving as senior advisers before their imminent departures on May 1 and Feb. 28, respectively.
The removal of the system's two senior executives followed six board members in June calling for Messrs. Grossman's and Grell's removal from their respective roles following the discovery of errors in its reported investment figures. The resolution calling for a vote for new leadership was ultimately withdrawn with no reason given.
The report says that a number of recommendations made by the Pennsylvania Department of the Auditor General in 2017 have yet to be adopted by the state's general assembly, including a requirement for a minimum amount of investment knowledge in order to "guide informed investment decisions and promote effective oversight of investment operations," as well as clarification of the trustees' fiduciary duties.
The report says there is no structured process at PennPSERS for selecting topics for continuing education, and there are no required areas of expertise for board members.
Mr. Funston said based on his firm's research, 15 states require governance and investment training for trustees, although he noted the list may not be complete.
He added the lack of expertise among U.S. public pension plan boards creates the big question for trustees: How can they trust advice, and how can they trust the advisers are really loyal to the beneficiaries and the participants?
Mr. Funston said the basic problem is the structure of boards in the U.S. requires the appointment of part-time volunteers dealing with huge sums of money affecting millions of people who are not "remunerated in any meaningful way for their service." These include retired teachers, elected officials and as trustees appointed by elected officials.
Funston Advisory Services' report for PennPSERS paints a picture of a board that has lost trust overall.
"Certainly, rebuilding trust will be an incremental and potentially prolonged process, but the work needs to begin immediately," the report says. "For the foreseeable future, the emphasis must be on 'verify then trust' while remaining professionally skeptical."
"The (board) needs to find the common ground for reform and move forward in unison. Stakeholders need to be reliably informed and understand PSERS' response and plan. While PSERS' current circumstances present difficult governance challenges, these fundamental governance reforms need to be addressed quickly and demonstrably," the report says.