Revisiting the Importance of Balance
The content of this post was adapted from the Talk, “The Importance of Balance,” authored and narrated by Lisa Morris.
Pension plan boards include trustees from a variety of different backgrounds, from highly educated and experienced professionals to lay pension-system members to political appointees. Regardless of who serves on a pension fund board, each trustee’s fiduciary responsibility is the same. The collective board must work together to meet all fiduciary responsibilities of the pension system. The board does this by leveraging the balance that comes from the diversity of education, experience, and abilities to solve problems and provide leadership.
Successful pension plan boards are those that demonstrate courage, agility, and resilience. Funding is a critical matter for pension plans because trustees have a responsibility to ensure that funds remain strong to maintain the retirement security of their members as well as economic stability in their states and municipalities. Most boards cannot invest their way out of funding deficiencies, particularly those plans that have not made their required annual contributions. When trustees must respond to funding challenges during volatile economic conditions, they must have the courage, agility, and resilience to consider a variety of possible options in the face of what could be uncomfortable pushback.
The best trustees are knowledgeable and well-rounded generalists. Board obligations extend to a wide range of topics. To make sound decisions, trustees must understand the political environment and legislative needs of funds, responsible and accountable risk-management, effective member benefit systems, actuarial principles and sustainable pension funding models, sophisticated IT systems, and many other topics. But, trustees neither should nor can be expert in all of these areas. Effective pension administration requires a mix of skills and abilities and the wisdom to hire the best consultants, advisors, and staff to administer sustainable and accountable programs. The challenge for all trustees is to reach for broader perspectives beyond their area of expertise and ask hard questions, regardless of the subject.
Defining roles is also important to finding balance. Trustees must have a basic understanding of the world of institutional investing, but they should not be directly responsible for choosing investments. Trustees should delegate this critical task to a committee of professionals. Hiring a qualified chief executive who can in turn hire an effective staff as well as consultants when needed is also an important board function. Finally, continuing education regarding the role of the board, when the board should delegate, and how the board maintains and executes the critical duty of oversight is vital for successful fund performance.
Trustees should remember that balance is about being prepared for a wide variety of challenges, the greatest of which may not be investment choices, as many people might assume, but practicing good governance holistically across all issues affecting the pension fund. To accomplish this goal, boards must: hire the right people, pursue trustee education, hold fast to good governance standards, and always ask the hard questions. Having a board with diversity in all realms – education, experience, expertise, gender, ethnicity, and views – creates balance and ensures the continued strength of the pension plan.
The full Talk and the supplemental materials are available as part of the Overview Series of the Board Smart governance e-learning system. Click here to review the full curriculum. For more information about Board Smart subscriptions, please visit www.boardsmart.com or contact info@boardsmart.com to schedule a demo.