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Ashby Monk, Ph.D., executive director of the Global Projects Center at Stanford University and a senior research associate at the University of Oxford, has been blogging about sovereign and pension funds since 2008. 

Follow him on Twitter at @sovereignfund.

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Oregon’s Senate Bill 120 Signals the Future for Pension Funds

The Oregon Legislature is considering a new Bill (Senate Bill 120) that will revolutionize the state’s public pension system and (I hope) serve as a model for other US states considering pension reform. What’s so important about SB120? Well, let's see. It will...

"Establish the Oregon Investment Council as public corporation to be governed by board of directors and supervised by executive director. Change name to Oregon Investment Corporation. ... Transfer duties of council, and State Treasurer as investment officer, to corporation... Establish Oregon Investment Corporation Fund and continuously appropriate moneys in fund to corporation for expenses of corporation. Exempt corporation from certain laws regulating government entities.’"

In short, SB120 will transform the $74 billion public OIC into a quasi-governmental corporation and endow it with a mandate and governance to build a professional and sophisticated investment organization (arguably in the image of some of its Canadian neighbors, such as bcIMC and AIMCo).

For more details on how it will do so, here is a jewel from the Bill:

“[The new OIC will] employ persons as it determines necessary or desirable to carry out the mission and powers of the corporation,” and “The executive director shall prescribe the duties and fix the compensation of the corporation’s employees, in accordance with the personnel policies adopted by the board.”

As I’ve argued time and time again, it’s paramount that public pension funds be able to hire and retain the best and brightest minds. In fact, in a recent paper, I argued, “Recruitment and retention of talented individuals is the single most important factor driving the success of any investment organization”. So, by taking budget authority for the OIC from the Treasury, this Bill will greatly improve the OIC’s ability to pay competitive salaries and properly resource their investment organization. This, in turn, will lead to it recruiting some top people.

Put simply, politicians generally do NOT have the appetite to pay internal teams the millions of bucks it takes to hire the best and the brightest (even if it means saving the state 10x in terms of external fees paid). As a rule, I find it far better to put the resourcing decisions in the hands of a highly competent Board of Directors.

And, as far the Board goes, it’s useful to note that the new Corporation will have a five member Board, and four of the Directors are required to be “qualified” individuals in the field of finance and investment (... the fifth voting seat goes to the State Treasurer). Again, I think this is a fabulous way to build a Board of Directors; as a small, smart Board will be able to get a lot of creative things done.

In short, SB120 (if it passes) bodes quite well for the OIC. This is all about improving governance, aligning interests and saving on the massive external fees paid to managers by bringing some of those external mandates in house. In this regard, it could serve as a useful model for other American pension funds.

Anyway, I’ll leave the last word to the OIC Chairman Keith Larson: “The act is a good idea because it improves governance by better aligning responsibility and authority for managing PERS and other state funds. In addition, the act should save Oregon millions of dollars in fees and enable better risk management.”