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Pension Q&A

Susan Mangiero

Susan Mangiero, the president of Pension Governance, LLC, works with both public and private pension funds, with a focus on trustee and regulator training, independent research and analysis. Her company recently started a database of pension lawsuits at www.pensionlitigationdata.com

What's driving the increase in lawsuits?

There's a clear trend upward in the number of cases involving pension fiduciaries. We're adding 250 to 300 cases each quarter. Most are private sector, but we are fast and furiously adding more public pension cases. I don't think public plan trustees truly appreciate what their liability exposure looks like.

What are the major shortcomings you see with regard to public sector boards of trustees?

Every chance I get, in writing or with speech-making, I continue to advocate for increased educational and experiential requirements as part of the trustee selection and retention process. Ongoing training for public plan trustees is likewise really important. The investment landscape has become increasingly more complex. It's always been critical to have a good process, but it's even more of a challenge when trustees have to choose from strategies with multiple parties and instruments, assets may not trade in a ready market or are "hard to value."

Are there any recommendations you'd make for trustees in working with outside investment consultants?

Trustees really need to understand the role the consultant is playing. If you use outside parties, you need to know what they are, and what they aren't, doing. Is the consultant playing the role of fiduciary? If so, how does that affect the decision-making process by the board of trustees? For example, it's critical to identify who has responsibility for assessing the risk controls used by external money managers. Likewise important, how does the use of outside consultants impact the trustees' personal and professional liability exposure? There may be a real gap between what the pension trustees think the consultant is doing on their behalf and what the consultant thinks he or she is doing. Does a trustee really want to wait until bad news such as realized losses, anemic performance or a fiduciary breach lawsuit to be forced to examine the fund's relationship with the consultant?

Are there any particular steps that boards should take to improve their performance?

I'd make sure that an investment policy is in place and that it has been updated to reflect material changes in the nature of the underlying liability (for DB plans) or pseudo-liability (for DC plans) or investment mix. Contribution patterns, loss of liquidity, aging workforce and new regulations are some of the many factors that could put plan participants at risk. It's also important to have a risk management policy, which is not the same as an investment policy. Whether the system invests itself or hires someone else to do it, the absence of a policy that addresses how risk is identified, measured and managed is a recipe for disaster. As we've seen in recent months, poor or no risk controls can expose a pension fund to gargantuan losses.

Are risk assessment policies the norm?

Anecdotally, I don't think a lot of plans have a comprehensive risk management policy nor do I think a large proportion of plans have written guidelines as to how they vet their external asset managers with respect to risk and valuation issues. Our pension risk management survey, done in conjunction with the Society of Actuaries, validates the existence of a serious gap between perception and reality. Most respondents claimed to be doing a good job of assessing investment risk.

However, their stated use of simple metrics suggests otherwise. I'd also check on fiduciary insurance to see what's covered and not covered and I'd recommend identifying the skill set that exists among existing trustees. What experience do they have? What education? How does that relate to their responsibilities for picking consultants or asset managers, optimizing the strategic asset allocation mix, changing benefits or changing investment policy statements? Additionally, some trustees believe that relying on more experienced colleagues absolves them from responsibility for poor or ill-informed decision-making. Legal experts are likely to make hash of that defense.

Is enough attention currently being paid to pension governance?

Frankly it's a little scary to think that millions of dollars are being invested by some individuals who have no background in finance, let alone portfolio management, derivatives, analysis of bundled fees and so on. Some boards are very sophisticated, but others are not. They don't have the knowledge to make the decisions and yet they are making the decisions that impact countless retirees and employees. The good news is that the tide is turning and none too soon.

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