empty boardroom There is aright mix of stakeholders and a right size to a board. (Photo:Shutterstock)

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How effective a public pension board is depends on itscomposition, and that composition can play out into higher returns,too.

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So says a brief from the Center for Retirement Research atBoston College, which explores the makeup of such pension boards to see how composition plays outon governance as well as returns.

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With most boards entrusted with oversight of both administrative and investment activities of aplan, says the brief, constraints can impair their ability to carryout those obligations in full—such as investment limitations thatcan prevent boards from putting the best mix of investments inplace, or a lack of authority to change employer and employeecontribution rates to achieve optimum results.

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Still, with the right mix of stakeholders—plan participants,government officials, and general public members with a votingpresence on the board—and the right size—generally between 6–10members, small enough to function efficiently while stillrepresenting the spread of stakeholders—a board can be effective inits decisions and even favorably affect a plan's 10-year investmentreturn.

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Researchers analyzed board effectiveness and scored public plansagainst their 10-year investment returns to see whether the formerinfluenced the latter.

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They found that plans with boards structured so that variousimportant decision areas did not get siloed by a division inresponsibilities, so that turnover did not deprive them ofinstitutional knowledge, and that encompassed sufficient financialexpertise to inform decisions, among other factors, did indeedcorrelate with higher returns.

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Specifically, the best practices identified by the study, whichdid correlate to a 24-basis-point increase in a plan's 10-yearinvestment return — a statistically significant factor — includedthe following characteristics of a board:

  • structured with a single fiduciary structure for bothinvestment 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

READ MORE:

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Mitigating your pension risk in2019

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Late-year volatility erases earlier 2018 gains forcorporate DB plans

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PBGC issues guidance on alternativewithdrawal strategies from multiemployer plans

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Marlene Satter

Marlene Y. Satter has worked in and written about the financial industry for decades.