There is a right mix of stakeholders and a right size to a board. (Photo: Shutterstock)
How effective a public pension board is depends on its composition, and that composition can play out into higher returns, too.
So says a brief from the Center for Retirement Research at Boston College, which explores the makeup of such pension boards to see how composition plays out on governance as well as returns.
With most boards entrusted with oversight of both administrative and investment activities of a plan, says the brief, constraints can impair their ability to carry out those obligations in full—such as investment limitations that can prevent boards from putting the best mix of investments in place, or a lack of authority to change employer and employee contribution rates to achieve optimum results.
Still, with the right mix of stakeholders—plan participants, government officials, and general public members with a voting presence on the board—and the right size—generally between 6–10 members, small enough to function efficiently while still representing the spread of stakeholders—a board can be effective in its decisions and even favorably affect a plan's 10-year investment return.
Researchers analyzed board effectiveness and scored public plans against their 10-year investment returns to see whether the former influenced the latter.
They found that plans with boards structured so that various important decision areas did not get siloed by a division in responsibilities, so that turnover did not deprive them of institutional knowledge, and that encompassed sufficient financial expertise to inform decisions, among other factors, did indeed correlate with higher returns.
Specifically, the best practices identified by the study, which did correlate to a 24-basis-point increase in a plan's 10-year investment return — a statistically significant factor — included the following characteristics of a board:
- structured with a single fiduciary structure for both investment and administrative oversight
- consisting of 6–10 members
- representing pertinent stakeholders
- possessing financial expertise by 1–2 members
- with an average tenure of 8–10 years
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Marlene Satter
Marlene Y. Satter has worked in and written about the financial industry for decades.
