DB Sponsors Focused on Governance Have Better Outcomes

A study by State Street identified a group of “Governance Leaders” among defined benefit (DB) plan sponsors who will upgrade four or more aspects of their governance over the next year. “This group shows that a commitment to improved governance standards can have wider benefits,” State Street says.

According to the research report, leading pension funds may be able to enhance long-term outcomes for their members by upgrading their risk management capabilities and governance frameworks to support potentially value-added investment opportunities including allocations to more complex assets.

Improving governance is clearly a top priority for all pension funds in the study. More than nine in 10 (92%) will upgrade at least one aspect of their governance approach in 2016. State Street identifies seven steps for becoming a governance leader:

• Optimizing balance of responsibilities—board vs. management;
• Increasing training / education opportunities;
• Changing board member recruitment;
• Revising incentive models;
• Increasing transparency to members;
• Increasing reporting frequency to board; and
• Increasing autonomy of investment function.

Governance Leaders are focusing on pursuing new investment strategies, prioritizing risk management capabilities, hiring more risk talent and expanding internal investment capabilities, enhancing their board’s effectiveness, and improving funding levels.

Governance Leaders expect to eliminate their DB plan deficits more quickly than other pension funds in the survey—perhaps a sign of their ability and readiness to put effective measures in place. They invest in governance improvements and prioritize diverse risk management expertise across their fund. And they adapt their investment strategies to help manage any funding shortfalls and to balance assets and liabilities.

According to the survey, Governance Leaders’ governing fiduciaries have above-average general investment literacy, and better understanding of the risks facing their fund. They have strong capabilities and strategic vision compared with other respondents.

Governance Leaders are also significantly more likely to increase their exposure to alternative asset classes than other pension funds in the survey, and they show a greater appetite for environmental, social and governance (ESG) investing.

Governance Leaders give higher priority to a broad range of risks—including longevity, liquidity and investment risks—than other pension funds. This may help them to achieve stronger, more wide-ranging risk frameworks than other pension funds, State Street says.

State Street surveyed 400 senior executives in the pension fund industry in October and November 2015. The full survey report is here.