The Role of the Fiduciary Board
This summary highlights the governance responsibilities of boards overseeing public retirement systems, emphasizing their fiduciary duties, key aspects of governance, delegation, and decision-making, and offers quick insights into best practices for governing public pension funds.
Governance of a Public Retirement System
Public retirement systems are created by enabling legislation, with fiduciary boards of trustees assuming responsibility for system performance. The board works alongside committees, staff, and external advisors, such as legal, investment, and actuarial professionals, to guide the system. The chief executive, selected and overseen by the board, advises on policy and ensures proper execution. The board is responsible for setting the system’s direction and ensuring that processes, people, and resources are in place to achieve organizational goals.
The Board's Fiduciary Role
The board’s role is to maintain a long-term, strategic focus while delegating daily tasks to staff. This balance ensures the board can meet its fiduciary duty, which includes acting in the best interests of fund participants. Trustees must exercise five key powers: conducting board business, setting direction and policy, approving key decisions, overseeing execution and verifying the reliability of information and advice. Effective governance means ensuring that delegation is handled prudently, with the board retaining overall responsibility even when tasks are delegated.
Prudence and Delegation
Historically, trustees followed the "Prudent Person Rule," which limited their ability to delegate tasks. Over time, governance practices have evolved to adopt the "Prudent Expert" standard, allowing boards to delegate responsibilities to experts, provided robust processes are in place. Boards now recognize that delegation is essential but must retain oversight. The "Prudent Investor Rule" adopted in many states further reflects this evolution, granting trustees more flexibility in managing investments and delegating responsibilities to qualified professionals.
Key Considerations for Setting Direction and Policy
In setting direction and policy, boards must consider several factors, including key decisions, available options, pros and cons of alternatives, and reliable information. Trustees need to ensure that policies are clear, that decision-making criteria are well-defined, and that progress is monitored consistently. Moreover, boards must delegate prudently, ensuring that responsibilities are given to capable individuals while retaining oversight.
Challenges Facing Fiduciary Boards
Fiduciary boards face challenges such as balancing short-term pressures with long-term goals, maintaining effective teamwork, and ensuring unified direction. Boards must avoid internal factions and conflicting guidance to staff, as this can lead to inefficiencies. Effective communication, clear roles, and proper delegation are key to overcoming these challenges.
Summary
In summary, the fiduciary board's role is to govern public retirement systems through strategic direction, prudent delegation, and robust oversight. Boards must act in the best interest of fund participants, balancing delegation with their fiduciary responsibility. Ensuring effective governance involves setting clear policies, collaborating with staff and advisors, and continuously improving board performance through self-assessment and ongoing education.
