A Pension Fund’s Path to Leadership in Governance

Pension funds that have their regulatory compliance in order have taken many of the same measures.


In an environment of tightening regulation and increasing risk, financial institutions are grappling with an unprecedentedly complex market. To address these concerns while also enhancing long-term outcomes, pension funds are taking immediate and decisive action on governance issues. According to recent research that we at State Street have conducted, 92 percent of funds plan to upgrade in 2016 at least one aspect of their approach on this front.

We’ve identified a group of pension funds that we call governance leaders. They are taking active steps to upgrade risk management capabilities and incorporate governance frameworks that support potential value-added investment opportunities, including allocations to more complex assets.

Governance leaders share six characteristics in their long-term strategies:

They understand the value of investing in governance upgrades. The governance leaders that we have identified plan to upgrade at least four of the following aspects of their governance plans over the next year:

• optimizing the balance of responsibilities between boards and management

• increasing opportunities for training and education


• changing practices for recruiting board members

• revising incentive models

• bolstering transparency for board members

• reporting more frequently to the board and

• achieving more autonomy in investment functions.

They eliminate deficits quickly. Governance leaders adapt their investment strategies to help manage any funding shortfalls and balance assets and liabilities. Notably, they plan to eliminate their defined-benefit-pension-scheme deficits sooner than other pension funds.

They invest in board-level talent. Governance leaders’ governing fiduciaries have above-average general investment literacy and above-average understanding of the risks facing their fund — one area in which they particularly outpace other pension funds.

They increase exposure to alternatives and ESG. With the long-term goal of improving portfolio diversification and increasing investment returns in a low-yield environment, governance leaders are significantly more likely to increase their exposure to alternative-asset classes. Governance leaders are also keen on environment, social and governance (ESG) investing. This trend suggests that fund managers anticipate increased scrutiny of the underlying investments on the part of pension plan members. Governance leaders are almost twice as likely to have a strong appetite for ESG investing over the next year, when compared with other funds.

They manage risks more effectively. Governance leaders are more likely to prioritize a broad range of risks — longevity, liquidity and investment — than do other pension funds, helping them achieve stronger, more wide-ranging risk frameworks. In fact, 30 percent of governance leaders report that they are very strong in terms of the sophistication of their risk models and analytics.

They invest in talent to create the most value. Enhancing in-house risk management and investment capabilities is a high priority for governance leaders, many of whom have already strengthened their internal risk teams. Leaders are also more likely than other pension funds to increase their use of external asset managers and consultants to help them achieve their long-term objectives.

An advanced and strategic approach to governance, in which tools and skills are the priority, better prepares fund managers to meet the dual objectives of delivering positive long-term retirement outcomes and minimizing risk exposure.

Scott FitzGerald is head of sector solutions for the Americas and global alternatives at State Street Corp. in Boston.

See State Street’s disclaimer.