The Secret Role That Consultants Play at Pension Funds

Investment consultants can help reduce the headline risks faced by pension funds that have political figures on their boards, according to a recent study.

Illustration by II

Illustration by II

Investment consultants to pension funds with political members on their boards can do double duty: provide crucial advisory services and be a convenient scapegoat for poor performance.

That’s the conclusion from a study on choosing pension fund consultants. The research found that as the number of political figures on a pension fund’s board increases, the likelihood that the fund will hire investment consultants also grows. Specifically, if a pension fund increases the percentage of political board members by one standard deviation, the number of consultants will increase by an average of 0.2.

Politicians can interact with public pension funds in a number of ways. In some states, elections are held to fill seats on these boards, while in others, governors or lawmakers may appoint board members themselves. According to the paper, state officials who can serve on public pension boards include treasurers, elected officials, and even school board representatives.

The paper, entitled, “Choosing Pension Fund Investment Consultants,” was written by Aleksandar Andonov from the University of Amsterdam, Matteo Bonetti from De Nederlandsche Bank, and Irina Stefanescu from the Federal Reserve. The authors based their findings on a sample of 168 U.S. pension funds managing combined assets of $3.7 trillion as of 2020. According to the paper, about 27 percent of the board positions at these funds are held by members who have a political affiliation.

“The increased reliance on investment consultants is consistent with prior evidence, which suggests that boards dominated by politicians are more sensitive to headline risk and therefore prefer to shift the responsibility in case of poor performance,” the study said. It added that this risk may lead political board members to “hire investment consultants not for their expertise or network, but rather as a shield against public criticism and legal consequences, even if they fail to add value to participants and face conflicting incentives.”


The paper also found that political board members at pension funds typically have strong financial education and expertise backgrounds, which suggests that their reliance on consultants is not due to a lack of skills.

This is not the first time that scholars have found that investment consultants can serve as scapegoats for underperformance. In a prior study published in 2017, two scholars from the University of Oxford and the University of Connecticut found that because institutional investors are heavily influenced by the recommendations made by investment consultants, they’re prone to use those consultants “as a shield to avoid blame if the plan underperforms.”

But politics isn’t the only reason that pension funds hire consultants. The paper also found that the amount of money that a fund allocates to alternative assets is directly proportional to the number of investment consultants hired by the fund.

For example, when a pension fund increases its allocation to private equity by 10 percentage points, the probability that it will hire a specialized PE consultant increases by 23.4 percentage points. According to the paper, this is often due to the fact that investment consultants typically have more expertise in specialized private market asset classes, such as private equity, hedge funds, and real estate.

“Overall, pension funds [that] rely more heavily on consultant services differ significantly from pension funds that do not,” the paper concluded. “Pension funds [tend to] use more consultants when they are larger, have more investments in alternative assets, and have more politicians on their board.”