Joel Harper Public Pension Governance Contracting Relationships and Performance

Why Governance Matters• Competence of board members – Balancing Stakeholder interests • Board Member Motivation... Does Public Governance Matter?• Investment Function • If there is a rel

Public Pension Governance, Contracting Relationships

and Performance

Joel T Harper Oklahoma State University

Rotman ICPM / Netspar / Maastricht University

Discussion Forum – October 2007

Why Governance Matters

• Competence of board members

– Balancing Stakeholder interests

• Board Member Motivation

Does Public Governance Matter?

• Investment Function

• If there is a relationship between

governance and performance?

– If Yes, what is the optimal board

Types of Public Plans

– Safety (Police and Fire)

– Other and Combined

Board of Trustees

Contracting Relationships

Board of Trustees

Portfolio Manager

Portfolio Manager

Portfolio Manager

Executive Director

and Staff

Investment Board Structure

Investment Board

Portfolio

Manager

Pension Consultant Actuary

Portfolio Manager

Portfolio Manager

Portfolio Manager

Portfolio Manager

Executive Director

and Staff

Board of Trustees

Sample of Plans

• Public Plans

– Required to provide information

– Board Structure can vary

• Plans with more than $200 million in assets between 2001 – 2005

• About 325 plan sponsors in the US

• 125 plans were asked to provide

information

Study Sample

• Currently, 71 Plans in Sample

– 33 State, 36 Municipal

– 33 Public Employees, 12 Teachers, 11

Safety, 15 Other or Combined

• Average Assets

– $5.4 billion mean, $1.5 billion median

Outside Trustees

“One (1) person who is a resident of the city

and shall not be a Participant in the Plan, a City employee or elected City official.”

“ four (4) residents of Mecklenburg County as trustees for three year staggered terms, one

of whom is designated Chairman of the

Board.”

“The remaining three are appointed

investment experts”

Plan Performance

• Funding Objective

– Are the plans fully funded, or moving

toward full funding?

• Investment Performance

– Fund Returns

– Asset allocation Decisions

– Manager Selection

Plans’ Status

• Average sample plan liability increases from

$5.8 billion to $8.7 billion during sample

period

• Average funded level decreases from 96.9%

to 83.6% over same period.

Does Board Governance

– % Board Appointed, % Board Outside,

% Board Ex-Officio, Board Size, Board Term

Fund Level (Gross Return)

• Time-Series Cross-Sectional Model

• Estimate on total return and excess

return basis

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Re = α + β + β + β

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Total Fund Return Empirical Estimations

Portfolio Excess Return Empirical Estimations

Manager Selection

• Cross-Sectional Model Estimation

– Excess Return = Gross Return - Benchmark

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Empirical Estimations

• Outside Board members do not

improve manager selection

• For Fixed Income, Appointed and

Elected Board Members improve

manager selection

• For Equity, board term has a negative impact on manager selection

Additional Findings

• Amount of assets managed increases excess return

– Favoring large clients?

• For Equity, higher fees lead to greater excess returns

– Pay to play?

• For Equity, better funded plans have greater excess returns

Does Governance Matter?

• Empirically, the effect of board

structure is not extremely strong,

especially outside board members

• Why not?

– Boards are similar (mostly representative) – Pension Consultant Impacts

• What if?

– Boards were not representative

– Boards were paid experts

• Is Funded level a proxy for trustee

competence?