| This research uses an agency perspective to analyze the effects of the composition of a public pension system's board of trustees on the system's investment decisions, investment performance, and setting of actuarial assumptions. Of primary concern are agency problems resulting from board dominance by trustees with political affiliations, as opposed to trustees elected by the pension system's membership. The data used in this study comes from seven surveys of state and local pension systems conducted by the Government Finance Officers Association and the Public Pension Coordinating Council from 1990 through 2000. This survey typically includes 250 to 300 pension systems and over 350 pension plans per year. With respect to investment decisions, the findings indicate that politically-affiliated trustees are associated with more conservative investment strategies, which is consistent with attempting to minimize potentially harmful outcomes in the political arena. Member-elected trustees are associated with a more active role in protecting shareholder rights and challenging the management of the companies in which they are shareholders. With respect to investment performance, the results show that the board of trustees has little impact on the system's financial performance beyond its choice of investment strategies or management practices. With respect to the setting of actuarial assumptions, the results indicate that during times of fiscal stress, politically-affiliated trustees will manipulate a public pension system's actuarial assumptions to achieve other political goals. This research also presents evidence on the importance of the various mechanisms to control agency problems. |
