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Public Pensions Should Invest More in Talent. Here’s Where to Start.

To compete for winning investment performance in capital markets, the plans need to build stronger internal bench depth. Compensation is part of the picture, but they also need to beef up their training camps.

Chartered Financial Analyst illustration
One of the arguments to explain the perceived underperformance of investments by public pension systems is that they don’t pay their professional staff enough to compete with the private sector. Too often, according to this school of thought, governmental pension staffs’ salaries are trapped in the lackluster payroll structures of the public employers whose workers are members of the retirement system.

Compensation is certainly a big part of the picture. Top investment talent often avoids these underpaid systems for the greener pastures in the private sector and the higher-paying endowment world. To evade the obvious, some pensions try to talk up the “psychic income” of public service, but that platitude has usually failed to produce winning returns. Lackluster investment results typically confirm that you get what you pay for.

Aside from the pay issue, the technical training and hands-on market experience of many public pension investment staff members is typically skimpier than that of their private-sector counterparts. Although there are indeed a number of credentialed governmental investment officials, it’s rare to find many who have ever conducted investment research for a commercial money manager — let alone managed a live portfolio of securities. The public pension industry thus needs to build more bench depth from the bottom up and celebrate its superstars financially, taking into account its unique goldfish-bowl environment and today’s widespread skepticism of governmental achievement.

Overall, the public pension community does make an effort to hire capable professionals, but lawsuit-averse government personnel rules too often favor minimum qualifications in the job descriptions rather than superior technical talent. Cynics would say public systems too often must hire the leftovers at the bottom of the professional talent pool, not the stars, and then they customarily promote from within — arguably a recipe for mediocrity at the yeoman staff level. (The notable exception is the chief investment officer slots, for which competitive external searches are more common.)

Many investment staffers have taken an undergraduate and perhaps some graduate courses in capital markets, and most senior staffers attend conferences and seminars featuring investment topics, but the number of staff professionals in public funds holding a Chartered Financial Analyst certificate seems relatively low in comparison with other sectors of the investment world. In an industry now populated with almost 200,000 CFAs, public pension systems should explicitly pursue a larger share of that rich talent pool, especially for positions above the entry level.

One constructive step in redesigning public pension staff compensation at all levels would be to formally include a salary supplement of perhaps 10 to 20 percent for those with rigorous professional credentials, and award partial step-ups for those climbing the ladder. In the abstract, this idea is not foreign to government compensation plans: Many school systems pay higher salaries for teachers and administrators with doctoral degrees, while firefighters enjoy all kinds of special-pay spiffs for paramedic qualification and other certifications. In the finance world, there are other relevant certification programs, such as the Chartered Alternative Investment Analyst credential for training in such portfolio segments as private equity, private credit and hedge funds.

In addition to the direct financial motivation such a salary supplement would provide internally, it also would enhance the employer’s attractiveness to external candidates. And that spark puts a little heat on uncredentialed incumbent staffers seeking promotions, knowing that better-qualified outside competition has an easier shot at senior positions. The additional budget outlay for these compensation enhancements would not even rise to a trivial rounding error when it comes to a system’s investment income.

There’s also a need for somebody like the National Conference on Public Employee Retirement Systems to partner with a qualified institution to establish a heavy-duty, industrial-grade in-service professional training academy that covers such technical topics as quantitative risk management, portfolio analytics, manager selection in the age of artificial intelligence, using index options and other derivatives to de-risk and enhance macro portfolio outcomes, and other skills that would elevate the standards of practice in public funds investment staff performance to a dramatically higher level. If done well, such an academy could eventually have more value to the public sector than the CFA program.

The larger pension consulting firms should also pitch in to provide technical content and instructors for a unified public-sector bootstrapping effort. Many of them conduct seminars for client CIOs and trustees, so there is no reason they could not take some of that instructional content and repackage it for wider consumption by the pension community’s support staffs. No one would expect them to give away the proprietary “secret sauces” they feature at their client retreats, so they can be selective in what they contribute.

The pension community’s aspirational career staff members would flock to such a program, especially if on employer-paid training time. The availability of these technical sessions would bolster morale and motivation as well as team IQ. And nowadays much of this can be delivered virtually and through interactive webinars, avoiding travel expenses.

Enabling staffers to sharpen their skills and work with the cutting-edge tools of their profession also would have strong retention benefits while attracting a new corps of younger professionals who would anticipate opportunities for recognition of professional know-how that may be taken for granted elsewhere. Training a higher-skilled cadre of investment analysts can only help their employers in the long run.

Such an institute could also offer a short confidential tutorial that might be titled “public pension investment leadership for nongovernmental crossover candidates.” A proactive outreach program like that would provide a career path to successful professionals who work elsewhere. If the word gets out, there should even be a few senior private-sector and endowment fund investment professionals who would consider taking a pay cut in order to contribute their talents for society’s greater good and not just their personal balance sheets. One would think that in their world, with thousands of wizened senior-level CFAs, there would be dozens of highly talented professionals who’d be interested in switching to public service as a career-capper.

The talent-search consulting industry should welcome such a facility with open arms, and smart headhunters should be delighted to help build out a public pension academy’s personalized private tutorial capacity to invigorate the talent pool. (There are likely to also be numerous public-plan deputies who’d welcome similar career coaching for the top jobs in their field.)

Of course, loading up the staff team with credentials and industry-specific training in key portfolio construction and manager selection skills will not alone assure superior results. Nor will these foundational measures fully level the playing field with the private sector. Not everybody can beat the averages — and actually, most won’t. But all public systems should strive to do their best.

This is the first in a two-column series on financial incentives for public pension investment staff. Read the second installment here.

Governing's opinion columns reflect the views of their authors and not necessarily those of Governing's editors or management. Nothing herein should be construed as investment advice.
Girard Miller is the finance columnist for Governing. He can be reached at
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