Public pension governance pertains to the individuals, institutions, laws, and processes that establish and maintain authority and oversight of a retirement system’s laws, operations, plan design, financing structure, and administration. For state-sponsored retirement systems, governance typically involves the governor, legislature, retirement system board of trustees, and staff to whom the board has delegated administrative responsibility. These individuals and groups work within the framework of the U.S. and state constitutions, statutes, and the retirement system’s policies and procedures. The governance framework for retirement systems sponsored by municial governments and other political subdivisions are established and maintained pursuant to state authority and generally function similarly to that of states, featuring the mayor, city council, and other like governing entities.
The prevailing governance model among state-sponsored retirement systems features a board of trustees providing oversight of operations carried out by retirement system staff members, using consultants and advisors hired or appointed by the board and staff. Types and degrees of responsibility and authority vary widely among boards, depending mostly on differences in state laws. Generally, public retirement boards are responsible for oversight of the system’s administration, including ensuring compliance with the following:
- federal laws and regulations (primarily those administered by the Internal Revenue Service  and the US Treasury Department)
- state laws and regulations
- industry standards, such as those set forth for accounting, financial reporting, and actuarial valuations, and
- the system’s own policies and procedures and strategic plan.
Pension board trustees are fiduciaries, and as such, are responsible for acting solely in the interest of plan participants and for the exclusive purpose of providing benefits for retirees and beneficiaries. In its best practice, “Essential design elements of DB retirement plans,” the Government Finance Officers Association addresses the role of trustees:
Board Governance. DB plans are usually governed by a Board of Trustees (Trustees). Board governance is a crucial component of a properly managed DB plan. It is the manner and process by which Trustees exercise authority and control over all plan activities. DB plan sponsors should pay particular attention to the composition of the Board of Trustees and make efforts to ensure that varied interests are represented and balanced among those of employers, employees, retirees, taxpayers and unions, if applicable. Criteria for governing board selection are crucial to ensure a competent board oversees the policy development of all plan activities. Criteria for the selection of most public pension boards are commonly set by the governing statute or other authority establishing the public pension system. The Trustees should focus on policy decisions, which ensure that the DB plan assets are used for the exclusive benefit of the plan members. Plan governance by the Trustees and staff must differentiate core responsibilities. Trustees and staff have a fiduciary duty to administer the plan for the exclusive benefit of plan members (duty of loyalty) and must act in accordance with reasonable standards of prudence.
Board responsibilities also include the appointing and providing oversight of a chief executive officer and sometimes other top executive positions; appointing or approving consultants; approving a budget; overseeing or approving payment of benefits; hearing appeals regarding disputes for issues within the board’s purview; and ensuring that systems are in place to report and monitor retirement system activities and processes.
Other responsibilities held by some boards include oversight of fund investments, setting of actuarial assumptions, approving contribution rates, approving benefit levels and eligibility criteria, and proposing or recommending statutory revisions.
A majority of state-sponsored public retirement systems have responsibility for oversight of investing pension fund assets. Approximately 30 percent of state-sponsored retirement systems do not have such responsibility. In such cases, that responsibility is granted either to a sole trustee (as in Connecticut, Michigan, New York, and North Carolina), or to a separate entity, such as the Massachusetts Pension Reserves Investment Management Board, the Minnesota State Board of Investment, and the Oregon Investment Council.
The median public retirement system board size is nine. The composition of public retirement system boards varies widely in terms of constituent groups that are represented; whether members are appointed, elected, or serve ex-officio; and what knowledge and experience, if any, are required.
Most public retirement system boards include participant representatives, most often trustees who are active (working) employees and members of the retirement system. Many boards also have one or more retiree representatives and one more ex-officio members. These tend to be state treasurers, budget officers, superintendents of public education, etc., or designees of such officials.
Most boards also have trustees who are both elected and appointed. Governors appoint most trustees who are appointed; legislatures or legislative leaders make some appointments, as do representatives of certain participant groups, such public school teachers or firefighters. Elected members predominantly are active and retired members of the system, elected by their fellow participant group members.
Trustee qualifications and education
Trustees at some public retirement systems are required to have certain qualifications, i.e., education or experience, to serve as a trustee. A small but growing number of systems require that trustees receive regular training or education to fulfill their trustee duties.
Standards and practices
The Government Finance Officers Association in 2010 approved a  Best Practice, “Governance of Public Employee Post-Retirement Benefits Systems,” which states:
[T]rustees of post-retirement benefit funds are bound by fiduciary duties, which can be divided into three categories:
- Duty of loyalty – The obligation to act for the exclusive benefit of the plan participants and beneficiaries. The trustees must put the interest of all plan participants and beneficiaries above their own interests or those of any third parties. Regardless of their selection process, fiduciaries must be reminded that they do not represent a specific constituency or interest group.
- Duty of care – The responsibility to administer the plan efficiently and properly. The duty of care includes consideration and monitoring of the financial sustainability of the plan design and funding practices.
- Duty of prudence – The obligation to act prudently in exercising power or discretion over the interests that are the subject of the fiduciary relationship. The general standard is that a trustee should act in a way that a reasonable or prudent person acts in a similar situation or in the conduct of his or her own affairs.
Other Standards and practices
- Uniform Management of Public Employee Retirement Systems Act
- NEA Issue Brief of Retirement System Board Governance and Independence
- The Clapman Report: The Stanford Institutional Investors’ Forum Committee on Fund Governance Best Practice Principles
- ↑ Internal Revenue Code
- ↑ Essential design elements of DB retirement plans
- ↑ Composition of public retirement system boards of trustees