Principles for Effective Public Pension Fund Governance

Principles for Effective Public Pension Fund Governance

The overarching goals of governance of a public pension fund are to protect fund
assets and to ensure that the fund is appropriately governed and managed for the
long-term benefit of beneficiaries and participants.
Webster’s defines a principle as “a comprehensive and fundamental law, doctrine or
assumption; a rule or code of conduct”. The following is a set of core principles for
the effective governance of a public pension fund.
These principles have been developed based on peer governance benchmarking,
best practice recommendations, academic literature and a review by a panel of
governance experts.
From these principles, leading policies, practices and desired outcomes should be
developed. Principles should form the basis for conduct and should guide the
decision-making and behavior of the board, the executive and staff.

   1. Effective and Capable Fiduciaries
   2. Ethical Leaders
   3. Open and Accountable to Our Stakeholders
   4. Risk Intelligent and Insightful in Our Decisions
   5. Long-Term View for the Needs of Our Beneficiaries and System Participants
   6. Continuous Learning and Adaptation to Changing Conditions

1. Effective and Capable Fiduciaries
Effectiveness is the super-ordinate principle for fund trustees to fulfill their fiduciary
responsibilities to the plan’s beneficiaries and participants.1 These responsibilities
must be thoroughly understood.2 Effectiveness means achieving desired outcomes,
including being financially sound based on sensible investment beliefs;3,4 admired
for customer service and quality of operations; demonstrated commitment to
effective retirement and health care solutions for members and employers; and
cost-effective administration.
Capability, the corollary of effectiveness, requires competent board members5 and
executives who are able to balance short- and long-term objectives and develop
and implement strategies for achieving intended outcomes.6 This necessitates
adequate resourcing and competitive compensation to attract and retain qualified
executives and senior managers.7 It also requires careful attention to allocation of
available board time and agency resources toward success in achieving identified
mission goals.
An effective governance framework maintains the appropriate balance between the
board’s responsibility for strategy and oversight and executive responsibility for
management.

Principles for Effective Public Pension Fund Governance

2. Ethical Leaders
Ethical leadership requires that the board and executive team share values about
what is important and work together with mutual respect in a constructive
partnership. Together, the board and executive set the tone at the top that
permeates the organization. Board members and executives are free from conflicts
of interest that may compromise the operations of the fund and the interests of its
beneficiaries.8,9 Behavioral skills and factors can be important risk or excellence
factors and should receive attention as part of a culture of continuous
improvement.
The board adopts and discloses explicit policies governing codes of conduct
concerning matters such as conflict of interest policies,10 and gifts and loans, while
recognizing the best ethical protection is the moral compass of the individual.
Potential or actual conflicts of interest are disclosed on a timely basis.11 There is a
culture of compliance with applicable laws, regulations and organizational policies.12
There are clearly established whistleblower policies and procedures.
Conflicts of interests also exist throughout the service provider chain.
Identification, minimization and management of such risks should be part of a
comprehensive code of conduct. Attention to fee structures and inherent conflicts
in provider business models can be critical in minimizing risks from exposure to
conflicts of interest.

3. Open and Accountable to Our Stakeholders
The board and executive are appropriately open in the way key decisions are made
and publicly disclosed.13 Governance rules are clear and disclosed.14 The board has
access to the right expertise and data free from undue influence.15
The organization structure and processes provide clear lines of authority and
responsibility.16 Effective metrics are used to monitor strategic, investment,
operational, financial and compliance results. Executives are accountable for their
performance, and their compensation is directly linked to performance outcomes
over appropriate time periods that reflect agency goals and beneficiaries' short- and
long-term interests. The board has the authority to hire and fire key officers.17,18

4. Risk Intelligent and Insightful in Our Decisions
The board approves the risk preferences and tolerances of the fund, and ensures
the enterprise is prepared for low-probability risks and long-term sustainability. An
effective enterprise risk management framework is used to consistently monitor
and report aggregated risk exposures and the effectiveness of mitigation and
control.19
The organization is willing to innovate and take calculated risks in the long-term
best interests of the beneficiaries and participants.
The management reporting process provides insight, not just data, to enable the
board to provide appropriate direction and advice to management and fulfill its
oversight responsibilities. The board obtains assurance from management20 about

Principles for Effective Public Pension Fund Governance

organizational performance, capabilities and risk exposures and obtains
independent reassurance regarding the reliability of management’s reports and
compliance with policies, laws and regulations.21 The fund’s management process
adapts as the economic, legal and regulatory environment and related risks evolve.
It also provides for accountability and transparency to beneficiaries and other
stakeholders.

5. Long-Term View for the Needs of Our Beneficiaries and System
Participants
The board is actively engaged in establishing the long-term direction of the
organization. It adopts a long-term view toward, for example, financial soundness
and effective retirement and health care solutions for members and employers.
The board integrates short term and long term perspectives on both assets and
liabilities.22 Strategic choices are consciously made based upon strategic analysis
and long-term thinking, not just a planning and budgeting process.23 The board is
alert to long-term unintended negative consequences of short-term decisions and
maintains strategic flexibility to allow for uncertainty. In order to maximize
efficiency and effectiveness, it also prioritizes identification of opportunities to
collaborate with other fiduciaries in pursuing shared goals.24
Taking a long-term view is likely to be out of sync with influential industry
participants that have short-term business models and, at times, with stakeholders
that do not have the balanced perspective or obligations of a pension fund fiduciary.
This requires attention to both education of stakeholders and management of their
expectations.

6. Continuous Learning and Adaptation to Changing Conditions
The board conducts a regular assessment of its performance and capabilities.25 It
identifies the skills and capabilities required to fulfill its fiduciary roles and
responsibilities and maintains an inventory of existing trustee skills and capabilities,
as well as strengths, weaknesses, gaps and priority development needs.26
A board self-development plan addresses the continuous learning and development
needs for all board members based on a comprehensive and tailored individual
development process.27 Performance feedback is obtained through an annual board
self-assessment process28 which includes peer-to-peer and 360° assessments and
individualized feedback, as well as an understanding of stakeholder views.

Endnotes
1. Effective and Capable
   1. Peter Clapman, Chair, Stanford Institutional Investors’ Forum “Committee on
      Fund Governance, Best Practice Principles. May 31, 2007.
   2. Keith Johnson, Reinhart Boerner Van Duren s.c.

Principles for Effective Public Pension Fund Governance

   3. Keith Ambachtsheer, founding director of the International Center for Pension
      Management and an Adjunct Professor of Finance at the Rotman School at
      the University of Toronto (personal communication).
   4. Clapman, ibid.
   5. Clapman, ibid.
   6. Organization for Economic Cooperation and Development (OECD), 2004 and
      Bank for International Settlements, Principles for enhancing corporate
      governance, 2010.
   7. Ambachtsheer, ibid.

2. Ethical Leaders
   8. Ambachtsheer, ibid.
   9. Clapman, ibid.
   10. Clapman, ibid.
   11. Clapman, ibid.
   12. OECD, ibid.

3. Open and Accountable to Our Stakeholders
   13. Clapman, ibid
   14. Clapman, ibid
   15. Clapman, ibid
  16. Clapman, ibid
  17. OECD, ibid
  18. Clapman, ibid

4. Risk Intelligent and Insightful in Our Decisions
  19. OECD, ibid
  20. Clapman, ibid
  21. Clapman, ibid

5. Long-Term View for Needs of Our Beneficiaries and System Participants
  22. Ambachtsheer, ibid
  23. Clapman, ibid
  24. Ira Millstein (personal communication)

Principles for Effective Public Pension Fund Governance

6. Continuous Learning and Adaptation to Changing Conditions
  25. Clapman, ibid
  26. Clapman, ibid
  27. OECD, ibid
  28. Clapman, ibid