GLOBAL – Public pension governance is being hindered by not being able to benefit from the lessons learned in the private sector, according to a new study by the World Bank.
“The absence of a market for corporate control hinders the translation of lessons from the private sector corporate world to public pension governance,” says the study.
“The establishment of a fit and proper governing body for public pension funds thus may be even more important than the maintenance of a comparable body for private sector corporations,” write authors David Hess and Gregario Impavido.
Drawing on so-called “agency theory”, they say that “behavioural controls” regarding the governance of pension funds should be carefully designed.
Agency theory deals with what happens when authority is delegated to an agent – which may result in the agent taking actions that are not in the principal’s best interests.
In the corporate world, there is a “market for corporate control” in that companies can be bought if they perform badly due to bad management. Alternatively, bad management of a company will result in bankruptcy. And companies, or course, are also monitored by shareholders.
But, the authors say, there are few comparable control mechanisms in the public pension fund field. “A fundamental problem with public pension funds is how to achieve a workable separation of ownership and control,” Herr and Impavido say. They note that it is not always clear who is, in their terminology, the “residual claimant” who has to monitor the performance of the plan.
And the study notes that the trustee system has potential problems. “These representatives, however, may not bear sufficient wealth consequences of their decisions for there to exists for them the incentive to avoid moral hazard problems or to maximise pension value.”
“The challenge facing public pension fund managers is how to create the appropriate controls and incentives for trustees,” they add.
The study, “The Governance of Public Pension Funds: Lessons from Corporate Governance and International Evidence” is a World Bank policy research working paper. Hess is an assistant professor at Rutgers University and Impavido is a senior financial economist at the World Bank.