It Matters Who Sits on Pension Boards and How Big They Are, Study Suggests



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Researchers found investment returns are likely affected by the size of the boards, the expertise of members and other factors.

How the boards that oversee investments for many of the state and local public employee pension plans around the U.S. are designed can significantly affect how well the retirement systems perform financially, new research indicates.

Researchers with the Center for Retirement Research at Boston College created an “effectiveness index” for the boards that assigns them a higher score based on how closely they are following a slate of expert-recommended best practices.

They find that each one-point increase in a plan’s index score is linked to 24-basis-point, or 0.24%, gain in investment returns over 10 years. 

“These findings reinforce existing research that suggests that a board designed purposefully and effectively can have positive and long-term benefits for public pension plans,” says the brief, which was authored by Jean-Pierre Aubry and Caroline Crawford.

“Public pension funds may be best served by taking a holistic view of the many aspects of a board that contribute to its effectiveness, rather than focusing on any single feature,” they add.

State and local pension funds manage upwards of $4 trillion in assets for 20 million active and retired public employees, the brief notes. Public employees and employers make contributions to the funds and this money is invested, with gains going to help cover benefit costs.

Best practices the researchers factor into the index involve features like board structure, size, stakeholder representation, financial expertise of members and the length of their tenure.

The best practice for board structure that the researchers identify is to have a single board that oversees both investments and the administration of the plan, as opposed to two separate boards each responsible for one of those areas.

For board size, the best practice is to have between six to 10 members. And for the tenure of members it’s an average of eight to 10 years.

Who sits on pension plan boards varies from plan to plan. 

Data cited in the brief shows that as of 2018, on average, just over half of board members were plan participants, 15 percent were “ex-officio” members, such as treasurers or other government officials, and about one-third were members of the general public. 

Here the researchers say the best practice is to have at least one ex-officio member and between 20 and 70 percent of the board composed of active or retired plan participants.

They also say that it’s best to have at least two members with financial or actuarial experience. This too is factored into the index score.

The index assigns one point for each of the five best practices a plan is following.

Most plans, 75 of them, scored three on the index. Just two received the best score of five, and 13 a score of zero. The study evaluated a total of 145 state and local pension plans in the Public Plans Database.

A full copy of the brief can be found here.

Bill Lucia is a Senior Reporter for Route Fifty and is based in Olympia, Washington.

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