Promoting transparency for better pension outcomes
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The United States ranked 9th globally with an average total score of 52.
The public disclosures of the five largest pension fund organisations were reviewed. All organisations reviewed manage funds backing the pension entitlements of public sector workers. The United States has a large, mature and fragmented pension market. Many states as well as some counties and municipalities have one or more plans for their public sector employees. Private sector pensions are provided by employers or employer/employee associations. On a federal level, social security provides retirement and other benefits, paid by a combination of payroll taxes and a reserve fund.
Historically, defined benefit plans were the predominant type of retirement plan for both public and private sector workers. Since the turn of the century there has been a concerted move away from defined benefit structures to cash balance and pure defined contribution structures among private sector employers. Pension arrangements for public sector employees are still commonly defined benefit plans, although the last 10 years has seen hybrid defined benefit/defined contribution designs become more common.
Pension arrangements in the United States are highly regulated. Private sector arrangements are governed by ERISA whereas public sector pensions follow regulations determined by the respective state legislative bodies. In addition to these regulations, pension plans must also abide by tax regulations. In fact, it is sections of the US tax code that give rise to the names of many defined contribution arrangements in the US such as 401(k), 403(b), and 457 plans.
Overall Factor Ranking
Disclosures of American public pension funds are heavily influenced by GASB standards and the disclosures required as part of their Comprehensive Annual Financial Reports (CAFR’s). American systems scored first overall in performance disclosures but did less well in other areas, 9th in responsible investing, 10th for cost, and 11th for governance disclosures.
With an average cost factor score of 41, American funds ranked 11th. Individual scores ranged from 24 to 59. Similar to governance and responsible investing, the CAFR’s did not provide much relevant cost information. Disclosure of transaction costs was particularly poor with only brokerage fees being disclosed by any of the funds reviewed.
The funds did somewhat poorly on this factor with an average score of 47, 11th in the global rankings. Scores ranged from a low of 31 to a high of 59. Governance structure disclosures were good enough for fourth in the rankings, although it was often necessary to refer to several documents and/or web pages to find all relevant information. Compensation, HR and organisation disclosures were particularly poor. The US was one of four countries where there were no disclosures on board compensation and one of two countries where this was combined with no management compensation disclosure.
Performance disclosures for the American organisations received the highest average score of 87, ranking 1st overall. Individual fund scores ranged from a low of 79 to a high of 94. There was a lot of information disclosed across all components, but it was not always done in the most cohesive and convenient manner. Unfortunately, it was often necessary to refer to several documents and/or web pages to find all relevant information.
This was also a weak factor for the American organisations. The global rank was 10th with an average score of 35. There was a wide disparity in the scores, from a low of five to a quite respectable 64. Disclosure of responsible investing frameworks was the highest scoring area. All five organisations included RI as part of their mission/vision/overall fund strategy. Conversely, few organisations disclosed exclusion policies.
The performance disclosures required under GASB as part of the CAFRs resulted in a wealth of performance information being disclosed. We would have liked the information to be have been better organised. It is unfortunate that more governance, cost and responsible investing disclosures are not required by the GASB.
CalSTRS Comprehensive Annual Financial Report 2019 includes a table with asset class and related benchmark returns for 1, 3, 5 and 10-year time periods. The returns are clearly stated as net of investment fees and time weighted, including a more detailed description of the TWRR calculation. The detailed footnotes to the table describe the asset class benchmarks.
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New York City Bureau of Asset Management manages assets for the City of New York, including those backing the pension promises of the following five pension plans: New York City Employees’ Retirement System, the Teachers’ Retirement System of the City of New York, the New York City Police Pension Fund, the New York City Fire Pension Fund, and the New York City Board of Education Retirement System.
New York State Common Retirement Fund manages the assets employees of New York State government on behalf of members of the New York State and Local Retirement Systems.
The Federal Retirement Thrift Investment Board is the largest American pension fund manager by assets under management. It administers the Thrift Savings Plan (TSP), a tax-deferred defined contribution plan similar to private sector 401(k) plans which provides federal employees the opportunity to save for retirement.
While funds around the world do a good job of disclosing governance frameworks related to financial and investment risks, as revealed in the GPTB, but what is best practice for communicating governance around addressing large, one-off events such as the impact of COVID or war?
The transparency of pension fund disclosures has improved in the past year across the 15 countries and 75 pension funds measured in the Global Pension Transparency Benchmark, a collaboration between Top1000funds.com and CEM Benchmarking.
A minority of pension funds reviewed for the GPTB publicly disclosure their organizational strategy in a way that goes beyond disclosures of economic and market conditions and the impact on the performance of their investments. Michael Reid argues there is room for improvement in communicating key corporate activities to stakeholders.
Anne Simpson, managing investment director, board governance and sustainability tells Amanda White why transparency is so important at CalPERS and what the fund is doing to improve it.
Comprehensive, holistic value disclosures and compelling communication are key benchmarks for pension funds. This has been confirmed by the first year experience working with leading global pension funds for the Global Pension Transparency Benchmark, a collaboration between Top1000funds.com and CEM Benchmarking. In year two, in recognition of this belief and communication excellence, we have decided to award bonus points to funds preparing
The Global Pension Transparency Benchmark (GPTB) measured four factors in its assessment of transparency of pension fund disclosures, here Amanda White looks specifically at the level of cost transparency across pension funds globally.
Global Pension Transparency Benchmark advisory board member Lorelei Graye, says the benchmark combined with better data standards for incoming reporting will usher in more constructive transparency.
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CEM Benchmarking is an independent provider of cost and performance benchmarking information for pension funds and other institutional asset owners worldwide. It believes ‘what gets measured gets managed’ and is deeply committed to helping clients run cost-effective operations that generate value for their stakeholders. With vast industry knowledge and a robust database spanning 28 years and $10+ trillion in AUM, CEM helps more than half of the world’s top 300 pension schemes understand and manage their costs and performance. CEM also facilitates better pension outcomes by sharing cutting edge research derived from its proprietary databases.
Top1000funds.com is the market leading news and analysis site for the world’s largest institutional investors. It focuses on leading the global investment industry to continuous improvement through case studies of best practice in governance and decision making, portfolio construction and efficient portfolio management, fees and costs, and sustainable investing. The publication pushes the industry to question whether status quo processes and behaviours to tackle risks and opportunities will be sufficient in the future, and actively campaigns for diversity, sustainability, transparency, innovation and better alignment of fees in the investment industry. Top1000funds.com is read by investment professionals in more than 40 countries.