Luis Navas and Brad Kelly recently wrote a brief article entitled “New Governance Models Pay Off For Pensioners: The American vs. Canadian Pension Fund Experience.” The piece describes the professionalization of Canadian pension funds: more internal asset management, better salaries:
Most public pension funds in the U.S. are managed within government and are often just an extension of the state treasurer or comptroller office. Boards of Directors of these funds are also commonly comprised of government bureaucrat appointees and elected politicians. In Canada, public pension funds are moving away from this historic management style and are taking a more progressive approach to money management. . . .
It is hard for stakeholders and Boards of Directors to embrace the understanding that higher compensation levels are required to attract and retain top talent. However, once Teachers’ broke the barriers and began realizing the benefits, it did not take long for other Canadian pension funds such as the Canada Pension Plan Investment Board (CPPIB), Ontario Municipal Employees Retirement System (OMERS), Caisse de dépôt et placement du Québec (Caisse), and most recently Alberta Investment Management Co. (AIMCo) to follow.
During their transformations, each pension fund altered its governance philosophy, adopted market competitive compensation levels and incentive designs, recruited top talent, and internalized most, if not all, of their investment activity and expertise.
The more time I spend analyzing the issues confronting US public pension plans, the more I am convinced that the problem is not that there is not enough governance over public pension plans, but too much, or rather, the wrong type of governance. Many of the legal structures used to promote good governance, such as boards with trustee-like fiduciary duties, do not serve pensioners as intended. Partially, this is a function of the relative lack of accountability of pension boards compared to other board/beneficiary relationships like corporate boards, which are increasingly beholden to shareholders, and private trust trustees, who are much more likely to be successfully sued for breaches of fiduciary duty. Additionally, governance by elected and appointed officials often politicizes pension boards, reducing their effectiveness and returns (see, e.g., Romano). Professionalization, aside from the savings funds receive by in-sourcing investment management (and avoiding significant fees even in years where the external asset managers produce no significant returns), can help to insulate funds from political pressures. How? The professionalization I’m thinking of includes not just in-sourcing asset management, but rethinking the pension governance model entirely. The point is nicely made by Kirkland partner Jonathan Henes, writing on the NYC pension reform proposal:
New York City studied the best investing models to bring the governance of its pension funds into the 21st Century. For instance, New York City looked to Ontario’s Teachers’ pension funds, which is known to be top of its class, and observed that 95% of its investment decisions are made by professional investment managers. With Ontario’s Teachers and other best-in-class pension systems mind, New York City is proposing to completely restructure the management of its pension funds.
Rather than 5 boards and 58 trustees, the proposal will bring together the 5 pension plans under one roof to be managed by professional investors and a non-partisan staff. If approved, New York City will take the politics out of its pension plans and will streamline the asset management process. This restructuring is critical as the pension money needs to be protected and have the greatest opportunity to realize a reasonable rate of return.