Report Finds PSERS Board Suffers From ‘Lack of Trust’ and ‘Continuing Disagreement’ on Investment Decisions

An independent governance review paints a picture of disjointedness and dissatisfaction among investment board members.

Justin Merriman/Bloomberg

Justin Merriman/Bloomberg

The Pennsylvania Public School Employees’ Retirement System’s board is suffering from a “lack of clear, unified direction,” according to a governance review commissioned by the $72.5 billion pension plan.

The review, which was conducted by Funston Advisory Services, found that board members held clashing opinions on asset allocation and other investment decisions, impacting their ability to effectively govern the pension fund.

“There are some strongly held but very divergent trustee views on the current asset allocation, investment philosophy, investment policies, and investment metrics, etc.,” the report stated.

Funston, an independent consultant which has been working with the pension plan since December 2020, reviewed PSERS’ governance practices and compared them to those of peers including a range of public retirement systems, institutional investors, and corporations. It found that trustees’ views on fund performance were most strikingly at odds: While some board members think PSERS’ investment performance has been “satisfactory,” others view it as “unacceptable.”

“[This] highlights the need for the PSERB to clearly define its expectations and tolerances,” the report said. “There also appears to be a lack of clarity on the selection, modifications, and reporting of benchmark information.”


In its report, Funston attributed a portion of the incoherence to a general dissatisfaction with the asset allocation decision-making process. Historically, PSERS has proposed and adopted its asset allocation policy in a single, annual meeting. In 2020, the fund extended the process to two meetings. However, Funston said the time allotted to asset allocation remained a “relatively short period of time for the PSERB to examine all the underlying issues, submit questions to staff, the actuary and the investment consultant, come to consensus around capital market assumptions, consider different allocations and related issue sand understand the implementation implications, etc…” As a result, the asset allocation process was extended for months.

And, because these discussions were intended to take place over a shorter period of time, Funston concluded that PSERB was not able to conduct in-depth analysis of the underlying issues of the proposed asset allocation strategies. The consulting firm said this contributed to the lack of resolution over issues including liquidity, volatility, risk, return, leverage, and performance.

“To be clear, diversity of opinion is a strength,” the report said. “But at the end of the process, that diversity of opinion should result in unified and prudent direction to the staff so that they can implement the PSERB’s directions. At present, the unresolved differences manifest themselves on a more reactive, annual or even a meeting-by-meeting basis amidst continuing disagreements.”

In addition, Funston said PSERB also does not currently have a cohesive “strategic plan,” a leading practice amongst boards that establishes a plan for the future and includes a realistic assessment of the capabilities of the fund, such as its strengths and weaknesses.

“PSERB has not yet dedicated the time to develop a shared understanding, acceptance, and commitment to the strategic direction of the system,” the report said. “This is compounded by a lack of trust among some PSERB members, and between some PSERB members and the executive, that is contributing to PSERB and system dysfunctions.”

While Funston was conducting its review, PSERS disclosed that it was under a federal investigation related to a reporting error made by a consultant, as Institutional Investor previously reported. The Funston report largely avoided topics related to the federal probe.

“The Funston study was begun before, and remained independent of, the special internal investigation the Board launched over matters related to the DOJ inquiry,” PSERS said in a December statement. “Careful review and deliberation of the governance and system administration recommendations in the report will begin sometime after the Board receives the results of its special internal investigation.”