Investment governance of public sector pension funds

Abstract

This study sought to examine investment governance in public sector pension schemes. The interest to undertake this study was motivated by media reports and concerns about the underfunding and poor investment returns in public pension schemes, which translates to threatened retirement income. The main objective of the study was to examine investment governance practices in public sector schemes. Using regression analysis, the study sought to establish the relationship between core best practice governance factors and exceptional best practice governance factors and fund performance. These governance factors cover three key governance characteristics (i) institutional coherence such as clarity and focus of investment objectives, (ii) human capital in terms of competences and (iii) role clarity and processes used to make investment decisions. Core best practice governance factors (such as clarity and focus of investment objectives and leadership skills are essential to all types of pension schemes and hence form the minimum requirement for best practice governance. Exceptional governance attributes are those that are not within reach to all pensions but are additional attributes for fund excellence and would differentiate best in class funds from the rest. Examples of these attributes includes expertise and competencies of the board and decision making processes used by the pension scheme. The conclusions drawn from statistical analysis demonstrate that there is a relationship between best practice governance and fund performance. The findings indicate that core best practice can account for up to 22% of fund performance whereas exceptional best practice governance can account for up to 43.7%. Consequently, there is a significant positive relationship between governance and fund performance. These findings support those of other studies, which demonstrate the relationship between governance and fund performance.