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Pension Q&A

Gary Findlay

Gary Findlay is executive director of the Missouri State Employees Retirement System (MOSERS). The MOSERS board and staff have devoted a great deal of time and attention to the issue of pension governance. Their board governance policies were established in 1999 and have been updated regularly since then. They can be found here.

You've been in this pension business a long time. What changes have you seen?

Do legislators have a role in improving governance?

There needs to be a statutory framework that facilitates good governance. That's where I think the legislature comes into play. It's not being specific about what the boards must or can do, but providing the structure and authority. For example, does the board have the authority to establish its own operating budget? Or the authority to establish a pay plan for the employees of the system? Or the authority to retain legal counsel separately and apart from the legal counsel that might be representing the governmental unit? Can they retain independent auditors? Can they establish their own purchasing procedures? Do they have a prudent person or expert standard for investment? Do they have control over the actuarial assumptions? Can they enforce employer contribution collections? Those are the kinds of high level things that the legislature can establish that facilitate good governance.

There are also reporting requirements so that the people who grant the authority can be assured that things are being handled properly.

Is there any kind of model legislation for this?

The National Conference of Commissioners on Uniform State Laws developed UMPERS in 1997. That stands for the Uniform Management of Public Employees Retirement Systems Act. It basically gives boards the authority that I just described and establishes reporting requirements. But it is my understanding that it has not yet been passed by any state.

What about Missouri?

In our case, there was no need, because our boards already had the authority I mentioned. If you don't have the statutory framework, the best governance policies in the world won't matter.

How do you protect the authority you're given?

It requires a lot of openness and transparency. All of our reports are on our website and available to anyone. (http://www.mosers.org/) I think the way to protect the authority you're given is not to abuse it, but to use it to do the best job you can. Then the results speak for themselves.

Why is it important for boards to have the authority to establish their own pay plans?

If you're going to efficiently and effectively run a multi-billion dollar portfolio then you have to be able to attract and retain investment talent. You're competing with Wall Street. You're not going to be able to hire a hedge fund manager for $42,000 a year.

Why do you need to retain separate legal counsel?

The retirement board may find itself at odds with the plan sponsor. For example, the CalPERS board has sued the state for delaying contributions.

We know you've talked about the importance of clarifying roles and responsibilities in a governance policy. Has there been a change in thinking about those roles?

Up until 1994, the ability of trustees to delegate was pretty limited. But in 1994, there was a huge change. The ABA put out a document that we refer to as a restatement of trust. Before, they had said it would be imprudent to delegate. They totally reversed that in 1994 and said if you don't have the expertise to make decisions then it could be imprudent not to delegate. That cast everything in a whole new light. The trustees won't necessarily be investment experts but, more typically, will be policy people who can put controls and monitoring mechanisms in place and delegate to professionals the day to day activity. That's where it becomes particularly important to delineate roles and responsibilities.

What's the danger of not having a clear governance policy?

I think without a good governance process or good governance policies, you can frequently end up in situations where an oversight board actually ends up becoming an implementation board.

In any case, the board needs appropriate education, right?

Yes. We have a state law requiring education for trustees in Missouri. Trustees need to give guidance to professionals and monitor what they do. But they don't need to be involved in the day to day activity or deal with minutia. If boards are going to be involved in day to day implementation activity, the allocation model will, out of necessity, be restricted to a plain vanilla approach to investing..

You've tried to get away from lots of committees on the board. Why?

Some systems have a multitude of committees, but that's a personal preference. When you go to a committee structure, people defer to supposed experts in various areas. But in our case, everything is done as a whole body - rather than a few people thinking and others rubber stamping.

There's also a push and pull between how much time the staff spends doing the job and how much time they spend involved in policy discussions with various groups. If you have seven committees and they each meet monthly, then when does the work get done? Different people have different views on this. We have had committees. The last one was a governance committee — when that committee was established by the board, a sunset date was also stipulated — it was disbanded when the board adopted their initial set of governance policies. The general view leading to this approach is that if it is important enough for any board member to be involved, all board members should be involved

How have you benefited from the governance policies you put in place in the late 1990s?

If you have good governance policies and, as a result, good performance, you're much less likely to be subjected to [unnecessary] changes.

It's hard to get people really exercised about problems in a market like the fiscal year just ended. I haven't seen the numbers yet, but the typical return for a public fund for the year ending June 30th was probably 17 or 18 percent, and you could earn 16 percent just by showing up. If you're assuming 8 percent and get 14 percent, that's not going to be criticized even if other funds earned more. But if the typical return had been 4 percent and good governance helped you produce another 300 basis points and you brought in 7 percent, that's much different. I expect us to do better than most in down years and stay with the pack in up years.

Another big benefit to us has been low staff turnover rates. We typically have three to four percent turnover with a staff of 70 employees. People generally leave here only to retire or because a spouse was transferred. It's not uncommon for other agencies to have turnover rates that are a substantial multiple of what we experience. I think the cost of turnover is highly underestimated.

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