Governance-Based Solutions to Public-Pension Systems

Commentary

Governance-Based Solutions to Public-Pension Systems

A recent study by James Copland and Steven Malanga at the Manhattan Institute examines the substandard performance of public pensions and explores the role of pension-board governance in creating the outcome.

The study finds that since 2000, public pension-plan funding in aggregate has declined from fully funded to 74 percent funded, with 63 percent of the plans less than 80 percent funded and 20 percent of the plans less than 40 percent funded. The aggregate funded status would drop, however, to 50 percent if a market-based discount rate were used. The unreasonably high rate of return assumptions do not only understate unfunded liabilities but also incentivize plans to take unwarranted investment risks to keep up with the rising implied risk premium. In fact, the percentage of public plans’ assets invested in cash and fixed-income investments has dropped from 47 percent in 1992 to less than 19 percent in 2015.

Part of the problem is the lack of robust governance structures. Most public pension boards adhere to lenient standards of fiduciary duties, lacking in diversity and financial expertise. The majority of public pension boards are dominated by plan beneficiaries and elected officials. The study recommends improving board composition, adopting higher standards of fiduciary duties and other controls.

To read the study, go here.

Truong Bui is a policy analyst at Reason Foundation, where he works on the Pension Integrity Project.