Public-Sector Pension Plans: Strengthening Governance and Sustainability

Pension plans in the public sector have made meaningful progress over the past decade — improved funding policies, strong investment governance and favorable markets have all contributed to funded status improvements for many systems. At the same time, risks facing public systems continue to evolve: increasing complexity in investment options and administration, changing workforces, and mounting expectations around transparency and participant outcomes.

Protecting this funded status progress amid an evolving risk landscape requires attention to the broader governance, operational and risk-management practices that support long-term pension sustainability.

Strategic Delegation as a Governance Tool

Public retirement programs have devoted significant effort to building governance structures, particularly around investments. Boards and trustees are acutely aware of their fiduciary responsibility and the scrutiny that accompanies high-profile pension decisions. At its core, good pension governance ensures all aspects of the pension system — investments, benefit administration, and plan funding — are coordinated and effectively managed through transparent and robust processes and policies.

Even when all the elements of a strong governance framework are in place, structures can come under strain for a variety of reasons, such as the growing complexity of markets, the pace at which opportunities and risks emerge, and resource constraints.

For many public retirement programs, this signals it may be time to take a fresh look at where the board, investment committee, internal staff and external providers add the most value, and where delegation can strengthen both governance and outcomes. Delegation, when structured properly, allows boards to remain focused on strategy and oversight while leveraging specialized expertise for implementation and execution.

Investment Delegation Options

Public plan boards may be cautious about delegating key investment responsibility, preferring that decisions remain “at the table.” This instinct is understandable, especially in highly visible environments. However, increasing delegation can enhance governance and investment outcomes through greater efficiency, specialized expertise, enhanced controls and independent implementation.

An “increasingly delegated” model can be viewed as a spectrum:

• Limited Delegation: Allowing staff to rebalance weights of existing managers
• Moderate Delegation: Allowing staff or an OCIO to select managers in specific asset classes or up to pre-specified limits
• Full Delegation: Allowing staff or an OCIO to select all managers in the portfolio while maintaining the asset allocation in the policy ranges

As plans move along this spectrum, the potential benefits of delegation increase:

• Improved decision-making efficiency through faster responses to market opportunities and risks
• Access to broader expertise and scale, particularly for smaller plans
• Stronger role, process and reporting controls strengthen fiduciary oversight
• Formal frameworks help insulate investment implementation from external influences
• Less time spent on implementation creates greater strategic capacity for boards

Delegation varies by plan size, internal resources and investment complexity. Striking the right balance between delegation and board-level management is therefore an ever-moving target as fund size, resources and needs change. Larger state plans often rely more heavily on internal teams, while smaller and midsize plans may use third-party advisers or OCIO providers, particularly for resource-intensive asset classes such as private markets. OCIO models are most common among plans with lean or no dedicated investment teams. However, even when plans delegate manager selection, boards typically retain higher-order decisions such as asset allocation.

Whatever the model, delegation should evolve with the plan’s size, resources and needs and be supported by clear documentation, monitoring and periodic independent review. Integrating a fiduciary review (audit) into any delegated model ensures delegation expands and enhances your visibility by confirming that delegated responsibilities are carried out prudently and consistently with policy in addition to incorporating best practices.

Dive deeper with Aon’s Mastering Governance white paper.

Expanding Administration Governance

Plan sponsors have a fiduciary responsibility to ensure participants receive the correct benefits owed to them, and that the plan is protected against error, fraud and operational disruption. It is common for governance to start strong during initial implementation — including rigorous reviews of administrative systems or developers of custom systems — and in the review of ongoing data used for administration (e.g., payroll audits). However, gaps can emerge over time if:

• Data updates are not subject to the same quality controls as initial conversions
• Process documentation is not maintained or does not reflect actuarial best practices
• Resource constraints limit review of complex cases, calculations and disbursement controls

These gaps can have significant consequences including operational strain, participant dissatisfaction, legal exposures and unexpected financial costs when errors must be corrected. Sponsors can reduce these risks by periodically auditing administrative practices, systems and documentation. A governance-focused review might include:

• Reviewing calculation process and policies
• Assessing actuarial factors to ensure they remain up to date
• Ensuring data and payroll process documentation and controls are adequate and effective

Leveraging external pension administration and actuarial experts with deep technical knowledge and insights from other systems on emerging best practices can support strong administrative governance. The list below includes common administration models, though it is not meant to be an exhaustive list. The optimal balance between in-house and external support will vary depending on the size and complexity of the plan, and the internal expertise and resources available.

• In-house with expert review: Internal administration with external calculation review
• In-house with expert systems: Internal administration using systems developed by external pension experts
• Co-sourced: Internal administration supported by external systems and oversight
• Outsourced: External administration with sponsor oversight and policy control

Regardless of the model chosen, successful administrative delegation requires clearly defined roles and responsibilities, explicit expectations around service level, accuracy standards and reporting, and a mechanism for independent review and continuous improvement.

Pursuing a Sustainable Pension Plan Model

Good governance is not an end in itself; its purpose is to enable sustainable delivery of the pension promise in a way that supports both the financial health and workforce needs of the plan sponsor.

Sustainability for public pension plans can be thought of as the ability to meet benefit obligations over the long term that provide sufficient retirement income and support workforce strategies. The contributions required to finance these obligations must be supported by the tax base and workforce and be able to adapt to changes in economic conditions, demographics and longevity.

Many public pension systems have, in the face of budgetary constraints and large unfunded liabilities, made the difficult decision to reduce pension benefits. While strong benefits were once a differentiator for public employers, the leaner pension benefits of today may no longer provide a counterweight to the higher cash compensation in the private sector. This creates a sustainability challenge for public employers balancing workforce needs with the financial risks of expanding pension benefits.

Evaluating the Appropriateness of the Existing Plan Design

Improved funded status creates an opportunity to reassess whether current plan designs continue to support sponsor objectives. With strong governance and by leveraging internal and external benchmarking, plan sponsors can determine whether to maintain, enhance or redesign plan features in a sustainable way, protecting the funded status improvements of recent years.

Enhancing Perceived Value Without Unsustainable Costs

Benefit increases can be costly. As an alternative, sponsors can instead strengthen perceived value and retirement readiness without adding pension liability by:

• Adopting a total rewards perspective: Communicate the value of the total rewards package through individualized statements backed by benchmark data.
• Understanding employee perception: Leverage data and analytics to identify gaps between perceived and actual value
• Investing in education and communication: Help employees understand their benefit package and actions they can take today to improve retirement readiness
• Exploring flexible features: Recent legislation permits added flexibility in retirement plans and across benefit programs to support employee financial wellbeing

These types of initiatives can strengthen perceived value and retirement readiness while maintaining a disciplined approach to long-term pension costs.

Building Robust, Forward-Looking Funding Policies

Stronger governance around pension funding has helped improve public plan funded status, but some of the traditional funding policy designs may need to evolve as economic conditions, workforce demographics and stakeholder expectations change.

Sponsors can strengthen the sustainability of their funding approach by:

• Conducting sustainability studies: analyze how the plan’s funded status, contribution requirements and risk profile might evolve under a range of demographic and economic scenarios;
• Refining the funding policy design: Consider contribution approaches tied to funded status and risk, with clear triggers and guardrails for changing conditions.

We recognize that in many cases, funding may be dictated by legislation outside the control (or even influence) of those managing the plans. In such cases, this step may need to be adjusted to reflect the situation.

Bringing Together Governance and Sustainability

Public-sector pension boards and sponsors are operating in an environment where risks are not only evolving but also interacting in new ways. Investment complexity, administrative demands, workforce dynamics and stakeholder expectations all converge on the same question — can our governance framework support a sustainable pension promise?

To answer this question, consider:

• Re-examining investment governance through the lens of prudent delegation
• Strengthening ongoing administrative governance
• Viewing sustainability more holistically

Public plans that proactively modernize their governance and sustainability frameworks will be better positioned to deliver on their promises to current and future retirees, to employees, and to the taxpayers and stakeholders who ultimately support the system.

Learn more about Aon’s insights and capabilities for public-sector pension plans.

Disclaimer: This publication is intended solely for general informational and educational purposes. The information contained herein is not intended to constitute, and should not be construed as, investment, legal, accounting, tax, or other professional advice, nor as a recommendation regarding any particular investment, manager, strategy, governance structure, delegation model, or course of action.  

Aon plc is a global professional services firm, and its services are provided through its subsidiaries and affiliated entities. This publication was prepared by Aon Consulting Inc. (“ACI”), with input from professionals across affiliated Aon entities. Within the United States, investment consulting services, including discretionary and non-discretionary advisory and OCIO services, are provided by Aon Investments USA Inc. (“AIUSA”). Non-investment consulting services, including fiduciary governance, are provided by ACI.  

Any accounting, legal, or tax discussion contained herein is general in nature and should not be relied upon as accounting, legal, or tax advice. Readers should consult their own professional advisers regarding their particular circumstances. While care has been taken in the preparation of this publication, Aon makes no representation or warranty as to the accuracy or completeness of the information contained herein and disclaims any liability for any loss or damage arising from reliance on the information contained herein. All rights reserved.