Public pension governance and
            performance : lessons for developing countries
The author examines the relationship
            between public sector pension plan performance and
            management practices to improve the design and governance of
            public pensions in developing countries.  Understanding this
            relationship is important because better yields on public
            pension plan investment reduce the need for additional taxes
            to support retirees - and well-funded plans stand a better
            chance of paying promised benefits.  The author's model
            relates investment returns on public pension assets, as well
            as plan funding status, to features characterizing the
            pension systems' governance structure and authority,
            using new data set on U.S. state and local public sector
            plans. The following findings stand out.  The higher the
            fraction of retirees elected to the pension board, the
            stronger the negative effect on investment return in 1990,
            and the more variable the returns.  Systems fared about the
            same whether they had in-house or external money managers,
            or independent performance analysis (even if the external
            managers were drawn from the top 10).  But public pensions
            performed better when fund and actuarial computations were
            done by professional actuarial and investment counselors
            rather than relying on former or current employees to choose
            investment strategies.  Social investment rules hurt public
            pension yields.  Public pension plans which mandated that a
            certain portion of investments be director to instate
            projects generated much lower returns. The data show that
            many public pension systems funded their plans
            satisfactorily but others did not.  The results show the
            following.  Fiscal stress reduced stock funding ratios.
            Stock funding rates were lower, the higher the fraction of
            elected retirees and elected active workers represented on
            the pension system board.  Stock funding ratios were higher
            when a system had in-house actuaries, when the board
            authorized benefit levels, and when board members had
            liability insurance.  Stock funding rates were unaltered by
            state statutes guaranteering that benefits be guaranteed by
            law, or by legally set funding requirements, or by the
            state's ability to carry budget deficits from one year
            to the next.  Nor did they vary when dedicated or special
            taxes were earmarked for pension revenue.  Policymakers in
            developing countries can profit from the mistakes made and
            lessons learned by U.S. pension analysis. Although no single
            package of pension plan practices can optimize investment
            performance for all systems across all time periods, care
            must be taken when designing the regulatory and investment
            environment in which these plans operate.  Developing
            countries should study the work of the U.S. Government
            Accounting Standards Board.  The author discusses some of
            the complex issues that must be confronted when establishing
            funding norms for defined benefit pension plans in the
            public sector.