Politicisation at US public pension funds has taken a turn for the worse after a new law threatens to put politicians in charge of the Public Employees’ Retirement System of Mississippi (Mississippi PERS) the $30 billion pension fund for state employees, by sweeping away the existing board.
The new law would replace the 11-member trustee board, primarily made up of PERS members and retirees, with political appointments whereby PERS members and retirees on the board would drop from eight to two, and political appointees jump from two to seven. Currently, the only two political appointees are the state treasurer and one member appointed by the governor.
Unlike at some other US pension funds, this time the nub of the issue isn’t ESG. The main reason politicians in Mississippi want to get involved in governance at the pension fund is “insinuations of mismanagement.”
Their particular beef is the decision to increase employer contributions to try and shore up PERS’ under-funded status. As well as removing the existing board, the proposed House Bill 1590, now awaiting Senate approval, seeks to revoke a board decision passed last August to increase employer contributions.
Employer contributions are set to rise by 5 per cent over a three year period, beginning this July with a 2 per cent increase. The goal – to try and resolve PERS’ long-term funding ratio of 56 per cent.
Pension fund CIOs insist funding and investment strategy must go hand in hand. They say even with healthy returns, it’s impossible to invest their way out of poor funding policies and larger contributions from employers are essential to close the gap between pension funds’ liabilities and assets, especially given the decline in active members compared to retirees.
“The board has always acted in accordance with their statutory and fiduciary duty, and PERS will continue to serve its membership to the best of its ability,” PERS executive director Ray Higgins told Top1000funds.com. “Regarding the scheduled rate increase, appropriate funding in some manner is very important for the long-term needs of the plan. We all want to be a part of the solution.”
In a statement, PERS’ trustees argue that the new law would prevent essential funding, as recommended by the actuary. “As fiduciaries, we believe this is unacceptable,” they write.
“By rejecting the board’s proposed rate increase, this approach not only would jeopardize the membership, it would also hurt all taxpayers. The longer the plan goes without proper funding, the more it costs and the harder it gets, leaving future citizens with the liability.”
The current system works
The trustees argue that the current board structure has been in place for many years and the system has proven resilient, continuing to pay benefits through times of adversity like the GFC and pandemic. Moreover, they argue any change in leadership should be done openly and transparently.
They say PERS has a history of good returns, and low fees. One-, three-, five- and 10-year annualised returns are 7.76 per cent, 9.36 per cent, 7.63 per cent and 8.47 per cent respectively. Last fiscal year, investment manager fees were only $0.31 for every $100 under management – less than 75 per cent of PERS’ peer group.
The trustees argue that any change in governance would indirectly shift more power to politicians, in effect turning control over to the governor and lieutenant governor, especially since all appointments would be with advice and consent of the senate.
“This change has the appearance of an attempt to politicise the PERS board. Removing most of the current board members results in the loss of institutional knowledge and continuity,” they argue.
In August last year PERS lowered its assumed rate of return from 7.55 per cent to 7 per cent assuming that its investments (its primary source of revenue) will grow at a lower rate.
Governance and pension fund design expert Keith Ambachtsheer has flagged governance issues at US pension funds for years, arguing there are a few US states that have people who understand the principles around arms length governance, but that they are in a minority.
“The fundamental problem is a structural one. If PERS is not operationally arms-length from the Mississippi government, it turns the PERS board into a politically-motivated organization and mixing politics and pensions tends to produce winners and losers rather than ‘value for money,” he says.
