An Empirical Study of Pension Governance on Public Defined Benefit Pension Fund Performance

• In Event: State and Local Government Pensions and Audit Quality

Abstract

The public defined benefit pension (DBP) plans are of great importance to public employees’ retirement life and have gained increasing attention since financial crisis depleted the pension funding corpus and payouts. Current criticism about the pension liability discount rate reveals the deficiency of funding ratio as a measurement of DBP performance. Measuring DBP performance with investment return ignored the effects of administrative expenses and other related expenses affecting DBP funding.
This study employs the two stage data envelopment analysis (DEA) method to examine the DBP relative performance and investigates the impacts of pension governance on DBP performance. DEA takes advantage of incorporating multiple inputs and outputs for performance evaluation as well as generating efficiency scores to measure DBP relative performance. Research data were collected from several database resources as well as hand collected from pension fund websites and pension plan annual reports. Our sample included total 150 state and local pension plans from 2002 to 2013.
We have investigated several governance factors such as board size, board composition, financial expertise and investment authority. The results show that both appointed trustees and existence of a separate investment council are positively associated with DBP performance. This research enriches the literature of corporate governance and pension governance, especially in the fields of financial expertise and board purview. There has been little discussion of board financial expertise and board investment authority in the context of pension fund performance. Our research offers an insight to this issue with variables measuring financial expertise and board investment authority. Besides, the study provides a new way of evaluating pension fund relative performance as well as examining the influencing factors. Finally, the study sheds light on DBP administration and reform practices. The policy makers may take these factors into consideration when making related decisions.

Authors

• Guoquan Xu, Stevens Institute of Technology

• Fang-Chun Liu, Stevens Institute of Technology

• Guoquan Xu, Stevens Institute of Technology