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Enhancing Public Retiree Pension Plan Security: Best Practices for Trustees and Pension Systems

Executive Summary

AFSCME represents 1.6-million state and local employees and retirees that share a common commitment to public service and who have invested in a financially sound public retirement system for their financial security. AFSCME members participate in more than 150 public pension systems with assets totaling more than $1 trillion. Some of our members have the added responsibility of serving in a fiduciary capacity as a trustee of one of those public retirement systems. As an organization, AFSCME works to ensure our members’ financial security and to give those members who serve as trustees on public retirement systems the tools to be effective in that position.

To fulfill their mission, trustees and staff of public pension systems in the United States must invest billions of dollars prudently, ensure sufficient funds will be available to pay retirement benefits many years into the future, and make certain systems are in place to pay retirement benefits in a timely and accurate manner. Under the best of circumstances this is a heavy burden, and in recent years public pension systems have had to cope with additional economic and political challenges that have made the jobs of those who oversee and administer these systems even more difficult.

For many years, AFSCME has been a leader in the efforts to reform corporate governance, working to improve the responsiveness of boards of directors and executives to shareholders. The time has come for a similar focus on the governance of public pension systems. The retirement security not only of our own members, but of public employees and retirees generally, would be enhanced by identifying and implementing “best practices” governance policies that lead to well-educated trustees and staff with a clear understanding of their responsibilities operating in a transparent environment with safeguards to prevent even the appearance of a conflict of interest.

AFSCME has reviewed the policies of leading public pension funds, as well as public pension fund governance best practices research. The latter includes the Clapman Report, released in 2007 by the Committee on Fund Governance of the Stanford Institutional Investors’ Forum. The Clapman Report sets forth best practice principles in several areas, including trustee core competencies and addressing conflicts of interest. This report provides a useful analytical framework against which to measure specific policies appropriate to the needs of individual pension systems.

AFSCME has used this information to develop recommended best practices policy language for public pension funds in three key areas:

  1. Board Member Responsibilities and Core Competencies
  2. Board Member Education
  3. Ethical and Fiduciary Conduct, including:
    1. Fiduciary Duties
    2. Statement of Ethical Conduct
    3. Prohibition on Insider Trading
    4. State and/or Local Conflict of Interest Laws
    5. Avoidance of Appearance of Nepotism
    6. Limitation on Receipt of Gifts
    7. No-Contact Policy
    8. Disclosure of Communications
    9. Prohibition on Campaign Contributions (Pay-to-Play)
    10. Disclosure of Third-Party Relationships and Payments; Permanent Ban on Current or Former Board Members or Employees from Providing Placement Agent Services in Connection with the System

    We have two goals that led us to develop these recommended policies. Firstly, and most importantly, we want to ensure decisions by public pension fund fiduciaries are made solely in the best interests of plan members, retirees and beneficiaries. Secondly, we wish to provide examples of best practice policies that meet that objective but do not inappropriately tie the hands of those fiduciaries. We recognize few public retirement systems have the time or resources to conduct an extensive development and/ or overhaul of their governance and ethics policies. These recommendations can help systems review their existing policies, identify any gaps and revise them or develop new policies as appropriate.

    While our report cites the policies of a number of public pension systems from around the country, we want to acknowledge that many other systems have likewise developed strong policies in the ethics and governance areas. We hope systems do not simply “cut and paste” this work into their own policies, but instead use this report as a catalyst for development of policies specifically tailored to their own needs.

    Throughout these recommended policies, we refer to “board members” and “trustees” interchangeably. Also, we use the terms “chief executive officer,” “chief investment officer” and “general counsel” to refer to those persons with final staff-level authority over administrative, investment and legal matters, respectively, in a public pension system. We recognize smaller systems in particular may utilize outside service providers in lieu of in-house staff to fulfill the latter two functions. In those instances, the system should determine whether a staff role that is identified in a recommended policy is best suited for the outside service provider or available in-house staff.

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