One reason for the perceived underperformance of investments by public pension systems is that they do not pay their professional staff enough salaries to compete with the private sector. According to this line of thinking, pay for government pension workers is too often tied to the lackluster pay structure of the public employers whose workers are part of the retirement system.
Compensation is certainly a big part of the picture. Top investment talent often eschews these low-paying systems for the greener pastures of the private sector and the high-paying endowment world. To avoid the obvious, some pension schemes try to exaggerate the “spiritual income” of public servants, but their common practice usually fails to generate profits. Lackluster investment results usually confirm that you're getting more bang for your buck.
Salary issues aside, many public pension management staff generally have less technical training and market experience than their private sector counterparts. To be sure, there are many qualified government investment officials, but you won't find many who have ever performed investment research for a commercial fund manager, let alone managed an actual portfolio of securities. This is rare. Therefore, given its unique fishbowl environment and today's widespread skepticism of government performance, the public pension industry needs to work from the bottom up to build more bench tiers and financially celebrate superstars. There is.
Overall, the public pension industry strives to hire qualified professionals, but litigation-avoiding government personnel rules favor minimal job qualifications over superior technical talent. There are too many things to do. Cynics will say that too often public systems have to hire dropouts at the bottom of the professional talent pool rather than stars, and then traditionally promote from within, but perhaps This would be a recipe for mediocrity at the yeoman staff level. (A notable exception is the chief investment officer position, where external competitive search is more common.)
Although many investment staff take undergraduate and sometimes postgraduate courses in capital markets, and most senior staff attend conferences and seminars featuring investment topics, they do not qualify as Chartered Financial Analysts. The number of professional staff in holding public funds appears to be relatively small compared to other staff. Investment world sectors. In an industry that currently has approximately 200,000 CFAs, public pension systems should explicitly pursue a larger share of their deep talent pool, especially for entry-level and above positions.
A constructive step toward redesigning compensation for public pension workers at all levels would be to formally include pay increases of perhaps 10 to 20 per cent for those with rigorous professional qualifications, and to provide partial pay increases for those climbing the ladder. It would give him a step up. In the abstract, this idea is not unrelated to government compensation schemes. Many school systems pay higher salaries to teachers and administrators with Ph.D.s, while firefighters enjoy all sorts of extra pay for their EMT certifications and other certifications. In the world of finance, there are other related certification programs such as the Chartered Alternative Investment Analyst qualification for training in portfolio areas such as private equity, private credit and hedge funds.
Such salary supplements not only provide direct financial incentives within the company, but also increase the employer's attractiveness to external candidates. And that spark gives a little heat to underqualified current staff members seeking promotions who know that more qualified external competitors can easily fill senior positions. The additional budget expenditures for these enhanced compensation amounts to less than a trivial rounding error when it comes to the system's return on investment.
Additionally, organizations such as the National Conference on Public Employee Retirement Systems partner with qualified institutions to develop robust, industry-grade, in-service professional training academies that cover technical topics such as quantitative risk management, portfolio analysis, and analytics. It also needs to be established. Manager selection in the age of artificial intelligence, the use of index options and other derivatives to reduce risk and enhance macro portfolio outcomes, and the performance standards of public funds investment staff to a dramatically higher level. Other skills to raise. If done well, such academies could end up being more valuable to the public sector than CFA programs.
Large pension consulting firms should also collaborate to provide technical content and instructors for a unified public sector voluntary initiative. Many of them conduct seminars for their clients' CIOs and trustees, so there's no reason why they can't take some of that instructional content and repackage it for wider use by support staff in the pension community. . No one would expect them to have their own “secret sauce” to offer at client retreats. So they can choose what they offer.
Ambitious career employees in the pension community will flock to such programs, especially during employer-paid training periods. If these technical sessions are available, it will not only enhance your team's morale and motivation, but also your team's IQ. And now, much of it can be done virtually or through interactive webinars, saving you travel costs.
Enabling staff to develop their skills and work with the most cutting-edge tools in their field can also have significant retention benefits, while also increasing professionalism that is taken for granted elsewhere. This will attract a new group of young professionals looking for an opportunity to have their know-how recognized. Developing a more skilled cadre of investment analysts can only help employers in the long run.
Such an institute could also offer a short confidential tutorial titled “Public Pension Investment Leadership for Non-Government Crossover Candidates.'' Such an active support program would provide a career path for successful professionals working elsewhere. As word spreads, we're sure there will be several senior investment professionals in the private sector and endowments who will consider taking a pay cut in order to contribute their talents to the greater good of society, not just their personal balance sheets. is. One would think that in their world of thousands of cringe-worthy, senior-level CFAs, there would be dozens of highly talented professionals interested in transitioning into the civil service as career cappers. .
The talent search consulting industry should welcome facilities like this with open arms, and smart headhunters will be happy to help build the public pension academy's tutoring capabilities to revitalize the talent pool. Should. (Also, many public planning members would welcome similar career coaching for top jobs in their fields.)
Of course, simply equipping your staff team with qualifications and industry-specific training in key portfolio construction and manager selection skills will not guarantee superior results. Nor do these basic measures completely level the playing field with the private sector. Not everyone can be above average. In fact, most people can't do better than average. But all public systems should strive to do their best.
This is the first in a two-part series on economic incentives for public pension managers.
governanceThe opinion column reflects the views of the author and does not necessarily reflect the views of the author. governanceEditor or administrator of. Nothing in this document should be construed as investment advice.