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A Pension Fund’s Path to Leadership in Governance

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In an environment of tightening regulation and increasing risk, financial institutions are grappling with a more complex market than ever before. To address these concerns while enhancing long-term outcomes, we’re seeing pension funds take immediate and decisive action on governance, with more than 9 in 10 funds (92 percent) planning to upgrade at least one aspect of their governance approach in 2016.*

We’ve identified a group of “Governance Leaders” who are taking charge to advance long-term outcomes for their members by upgrading risk management capabilities and governance frameworks that support potentially value-added investment opportunities including allocations to more complex assets.

We classify Governance Leaders by six characteristics that drive their long-term strategy.

1) They Understand the Value of Investing in Governance Upgrades.
With a focus on improving investment returns while keeping risks under tight control, Governance Leaders will upgrade at least four of the following aspects of their governance over the next year:

  • Optimizing balance of responsibilities – board vs. management
  • Increasing training / education opportunities
  • Changing board member recruitment
  • Revising incentive models
  • Increasing transparency to members
  • Increasing reporting frequency to the board
  • Increasing autonomy of investment function

2) They Eliminate Deficits Quickly. Governance Leaders adapt their investment strategies to help manage any funding shortfalls and to balance assets and liabilities. As such, they expect to eliminate their defined benefit (DB) pension scheme deficits more quickly than other pension funds.

3) They Invest in Board-Level Talent. Governance Leaders’ governing fiduciaries have above-average general investment literacy, and better understanding of the risks facing their fund (where they significantly outpace other pension funds). These strong capabilities and strategic vision help leaders to achieve mission clarity and support members’ retirement outcomes.

4) 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, suggesting a stronger focus on the longer-term sustainability of the fund and anticipated increased scrutiny of the underlying investments by pension scheme members. Governance Leaders are almost twice as likely to have a strong appetite for ESG investing over the next year, compared with other funds.

5) They Manage Risks More Effectively. Governance Leaders are more likely to prioritize a broad range of risks – longevity, liquidity and investment risks – than other pension funds, helping them achieve stronger, more wide-ranging risk frameworks. In fact, 30 percent of Leaders report that they are very strong in terms of the sophistication of their risk models and analytics.

6) 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, where tools and skills are the priority, better prepares Governance Leaders to meet the dual objectives of delivering positive long-term retirement outcomes while minimizing risk exposure.

To read more about State Street’s Asset Owners research please click here or contact State Street.

*According to State Street’s 2015 Asset Owners Survey of 400 senior executives in the pension fund industry conducted by Longitude Research in October and November 2015.

Respondents of the global survey included representatives of public and private pension

or retirement systems, and superannuation funds across 20 countries. The quantitative

research was supplemented by in-depth interviews with 43 pension industry experts

from 13 countries.


Exp. Date- 6/30/17

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