Governance of Public Employee Postretirement Benefits Systems

Public employee postretirement benefit systems (e.g., retirement plans and other postemployment benefits, or OPEB, trusts) are typically established by state and/or local law and are generally governed by boards of trustees (i.e., boards, governing boards, trustees) with a duty to use all legal and statutory mechanisms available to ensure the long-term financial viability of the plan(s) they oversee. Because public monies support the employee, employer, or direct contributions that fund public employee postretirement benefit plans, transparency is an essential aspect of overall governance. Trustees and their agents are obligated to act in accordance with certain fiduciary standards, including:

• Duty of loyalty: The obligation to act for the exclusive benefit of the plan participants and beneficiaries. Trustees must put the interest of all plan participants and beneficiaries above their own interests or those of any third parties. Regardless of their selection process, fiduciaries must be reminded that they do not represent a specific constituency, interest group, or individual plan members. In addition, the fiduciary’s decisions must not be motivated by advancing or expressing the trustee’s personal views concerning social or political issues or causes.
• Duty of prudence/Duty of care: The obligation to act prudently in exercising authority or discretion over the interests of the fiduciary relationship. This includes investment decisions but also other acts of discretion. The general standard is that a trustee should act in a way that a reasonable or prudent person would act in a similar situation or in the conduct of their own affairs. The duty of prudence includes ensuring that the plan design and funding practices follow the retirement system’s policies. A retirement system may subject a trustee to a higher level of care.[1]

Criteria for selecting most public postretirement benefit system boards are normally set by state statute or another authority that establishes the system. Governing fiduciaries set strategy and policy, determine decision-making authority, and delegate day-to-day management of the retirement system. Proper board structure and clearly stated board roles and responsibilities that are consistently and fairly enforced promote good governance and provide legal protections for both plan fiduciaries and plan participants. Through prudent management, trustees, individually and collectively, must act in the best interest of all plan participants and beneficiaries.

1. Governance Structure:
   • Board Size. The postretirement benefit system’s board of trustees should be neither so large as to be unwieldy nor so small that it runs the risk of being led by a narrowly focused group of decision makers or of being unable to get a quorum to make decisions. Optimal board size depends on the size and complexity of the system, if not defined by state statute.[1]
   • Board Composition. To operate effectively, a board should include members who have a diverse mix of skills, competencies, and behaviors, including leadership, teamwork, communication, planning and organizational abilities, and knowledge of sound decision-making principles. A successful board actively pursues and makes use of these skills and behaviors. Board composition should reflect the varied interests of those responsible for funding the plan and may include plan participants and retirees, citizens of the governmental unit, and officers of the plan sponsor, as well as independent directors. This assures balanced deliberations and decision making.
   • Term Limits. Define board members’ term limits, such as duration of a term and maximum number of terms that board members may serve.
2. Governing Expectations and Roles:
   • Roles and Expectations. The role of the board should be clearly defined to include scope of decision-making authority and responsibility over budget, procurement, investments, staffing, compensation, and operations.[2] The role of administration/employees should be clearly defined distinctly from those of the board to ensure that authorities and responsibilities are clearly characterized and optimal operations and communications are maintained.
   • Self-Evaluation. The board should conduct self-evaluations to assess if it is fulfilling its duties and responsibilities, and to assess if appropriate processes are in place for due diligence and oversight of the retirement system.
   • Transparency and Reporting. Governing boards should publicly report on their governance structure (e.g., expectations, responsibilities, and board members), decisions, and plan status to members and other stakeholders via various instruments, such as public website, annual report, popular annual financial report, etc. Governing boards should also publicly report on a regular schedule, and in compliance with applicable open meetings laws and public records laws.
3. Governance Policies:
   • Mission and Vision. A postretirement benefit system should define its mission and vision as, along with the objectives upon which decisions are based.
   • Code of Ethics. A governing board should develop, adopt, update, and abide by a code of ethics regarding standards of conduct specific to trustees and plan employees, in addition to any applicable state or local requirements. The code of ethics should, at a minimum, address:
     • Loyalty. Public fund fiduciaries must make all decisions in the best interest of system participants, placing those interests above all other interests.
     • Decision Making. Decisions must be made in a fair, honest, and open manner, with information shared among fellow fiduciaries and all interested parties to enhance the quality of the system’s decision-making process. Policies should:
       • Require voting members to have experience, education, or background in financial management.
       • Encourage fiduciaries who are plan participants to fully disclose any direct benefit that they could potentially receive from decisions made by the governing board and avoid voting on matters that affect or involve their individual benefits.
       • Identify a mechanism for independent trustees to vote separately on such matters if a conflict of interest affects multiple members.
     • Personal Conduct. A public postretirement benefit system’s fiduciaries, including those who are under contract to provide services to the system, must take all reasonable steps necessary to ensure a full and accurate understanding of the trust, conflicts of interest, financial disclosures, and other ethics-related laws that apply to the system. They must conduct their official and personal affairs to ensure that they cannot be improperly influenced in the performance of their duties.
     • Relationships with Others. To foster trust and limit practices that create the appearance of conflicts of interest, governing boards should consider including restrictions in their code of ethics on the following behaviors:
       • Former employees and trustees soliciting business from the plan for a specified period of time.
       • An employee or trustee accepting contributions or gifts from current or potential business partners, their agents, or their representatives that could be seen as to influence their decisions or actions on behalf of the public postretirement benefit system.
       • Payment of finder or incentive fees to third-party marketers or other consultants for new or increased business. (See the GFOA Best Practice, Selecting Third-Party Investment Professionals for Pension Fund Assets.)
       • Any action that would bring into question the independence of the board or employees, or the propriety of the system’s decision making.
   • Board Education. New trustees must receive orientation training explaining their responsibilities and fiduciary duties as well as the duties of the system’s employees and agents (e.g., actuaries, attorneys, advisors, and fund managers). A program of continuing education must be developed and maintained in compliance with any applicable laws, and participation should be required.
   • Succession Planning. A policy for transition of leadership is needed to ensure continuity of governance.
   • Investment Policy. The board must develop, adopt, update, and abide by a comprehensive set of policies and procedures for investing and safeguarding plan assets. (See the GFOA Best Practices, Investment Policies for Defined Benefit Plans and Investment Policies for Tax-Deferred Retirement Savings Plans.)
   • Funding Policy. The board must develop, adopt, update, and abide by policies and procedures, including any policies specified by applicable law, to ensure that the costs of pension and other postemployment benefits plans are properly measured and reported to sustain funding. (See the GFOA Best Practice, Sustainable Funding Practices for Defined Benefit Pensions and Other Postemployment Benefits (OPEB).) The plan design should be periodically reviewed to make sure the board understands the long-term fiscal viability of the plan and alignment with the plan’s funding policy. Any concerns identified should be communicated to the plan sponsor. (See the GFOA Best Practice, Design Elements of Defined Benefit Retirement Plans.)
   • Professional and Contractual Services. The board must develop, adopt, update, and abide by policies and procedures for selecting and evaluating agents such as actuaries, attorneys, auditors, advisors, and fund managers. These policies and procedures, in addition to satisfying compliance with any applicable procurement laws, must encourage an open process that is free of actual or perceived bias and conflicts of interest. (See the GFOA Best Practice, Selecting Third-Party Investment Professionals for Pension Fund Assets.)
   • Monitoring Policy Compliance. The board should implement a schedule of routine reporting that enables it to monitor compliance with all aspects of its policies and direction, and to facilitate appropriate oversight of the responsibilities delegated to the agents managing and advising the postemployment benefit plan.
4. Governance Manual:
   • Full Transparency. The board should develop, adopt, and maintain a written governance manual that encompasses all board policies that supports good governance and facilitates stakeholder transparency. At a minimum, this manual should include:
     • An outline of the authority under which the system operates.
     • A section outlining the roles and responsibilities and code of conduct of the board of trustees, administrator (director or executive director), and employees, and when authority is delegated to either the board or employees.
     • A description of all permanent (standing) committees, with a copy of the committee charter.
     • All board-adopted policies and any applicable statutes, regulations, and other relevant documents.

Footnotes:

1. The National Association of State Retirement Administrators provides details on sizes of existing boards at https://www.nasra.org/governance.
2. Boards need to manage risk and establish risk tolerance. In addition, boards should review and understand any fiduciary liability protection that may be in place. For example, a prudent investor standard of care obligates fiduciaries to invest in trust assets as if they were the fiduciary’s own and to apply this standard of prudence to any investment in the plan’s total portfolio. The prudent investor rule dictates that fiduciaries always consider the tradeoff between risk and return, and diversification of investments.