Governance Effectiveness in Pensions

by | Aug 13, 2018 | Governance, Pension Funds

An Approach for Effective Governance Assessment

In the compensation and governance world, it is commonly known that shareholders are relatively quiet when companies are successful and driving returns. However, when things go south, shareholders question more and demand to know how corporate governance can be improved. These demands are accentuated for public pensions. When pension funds are performing well, there is little pressure, but after weathering through the past two recessions and, for some, experiencing co-payment holidays, under-funding status levels are understandably correlated to the increased level of pressure they are experiencing today.

In 2007, Ambachtsheer, Capelle, and Lum published The State of Global Pension Fund Governance Today. This study found that on an annual basis poor governance costs pensions 100 to 200 basis points (1%-2%). In our current market, where each basis point is precious, it is clear that governance is low hanging fruit on which all pensions should be focused.

An understood best practice in publicly traded companies is to conduct governance effectiveness assessments and disclose this activity on an annual basis. Due to the financial impact governance has on the success of publicly traded companies, the pension community should be proactively embracing this practice.

Pensions that undertake regular governance assessments can evaluate were they stand; maintain proactive improvement strategies; enable their Boards to become more effective in their oversight roles; and drive higher levels of financial success and sustainability for their funds.

When conducting assessments, pensions need to focus on:

  1. Their Board members’ knowledge and ability to oversee investment and financial operations.
  2. The composition of their Board members and the skills they possess.
  3. Their governance frameworks and strategic improvement aligned to their longer-term strategies.
  4. Ensuring that there is clarity on the roles of the Board and management, which enables both groups to function at their highest levels.
  5. The establishment and maintenance of high-performance cultures that include competitive compensation and proactive incentives (that only reward positive results).

It is our experience that pension Board members are committed to ensuring that their fund can deliver on the pension promise to its members. The bottom line is that Board members “do not know what they do not know.” Undertaking a simple governance assessment is a recognized best practice in the governance world; and a great way to improve areas that pension fund board members never knew could be improved. This best practice ensures funds are able to safeguard 100 to 200 basis points for the benefit of their members.

How to Build & Motivate High Performance Investment Teams

by | Jul 5, 2018 | Executive Compensation, Governance, Pension Funds

A Summary of Our Presentation at the NCPERS Conference

Global Governance Advisors recently presented at the annual NCPERS conference for public pension Chief Investment Officers (CIOs) on how to build and motivate high performance investment teams.

Two Aspects of Building High-Performance Teams

The presentation focused on two critical points:

  1. Ensure that the compensation plan’s offering is fair and/or competitive to attract and retain key personnel.
  2. Establish an “at-risk pay” plan that effectively acknowledges and rewards investment staff for performance and contribution toward achieving higher returns for their pension funds.

Public pensions throughout North America need investment professionals to help manage the trillions of collective dollars with which they are intrusted. Public Pensions are competing with a private sector financial community that historically pays their employees at highly competitive compensation levels. The success of working in this sector is easily reflected in the 2018 Forbes World’s Billionaires list where 14% made their fortunes in the finance and investments industry – the highest-ranking industry represented in this list. It’s important to understand what other public funds are doing in the way of competing in the private market of pension compensation.

Positively designed “at-risk” incentive plans are easy ways to be competitive, reward employees for their performance, and mitigate risk. In the compensation world, the total opportunity is what is most important. By providing a reasonable base salary public fund boards can supplement salary with an incentive that will only pay out if positive results/performance is achieved.

What is the value to the fund if the performance increases by 5%, 10%, 20% or more? And, is that increased performance worth additional compensation?

Working in both the public and private sectors, GGA recognizes that public perception and headline risk are real obstacles for public pensions. As a result, public pensions will struggle to be competitive if they do not arm themselves with the objective facts. A few years ago, one of our clients struggled with higher than normal attrition; as well as difficulties hiring new investment staff. They theorized that they were not competitive nationally and were especially not competitive in their local community where several large public funds competed for talent.

They too, were straddled with public pressures and publicly dictated pay bands but wanted to objectively investigate their overall competitiveness. On behalf of this client, GGA conducted a nation-wide custom compensation survey and determined that their investment team positions were below the national levels for similar positions within public pensions. More importantly, the study showed that not only were they below the national levels, they were substantially below the compensation levels offered within their own community. Now, armed with current objective data, they were able to argue the case that adjustments were required if they were to continue to managing billions of dollars on their members’ behalf. The resulting increase in performance changed the fortunes of the fund.

At no point do we claim that it is easy for public funds to raise their compensation levels or implement incentive plans. However, if boards of trustees and executive teams throw up their hands and claim defeat before they try to proactively manage their teams, then they will continue to lose staff or fail to attract and retain the skilled professionals they need to grow their fund’s assets and protect the financial well-being of their members. Building your arguments on current objective facts and calculating how at-risk incentives can drive performance and higher returns will only strengthen your case and get you what you need to be successful.