U.S. Models of Retirement System Governance: A Historical Synopsis and Possibilities for the Future
Richard L. Hannah, Middle Tennessee State University-USA
Objectives
The objective of this paper is to produce a historical summary and suggest possible evolutionary paths for pension system governance. In this context, governance is defined primarily as the form and content of board decision making. Focusing on topics that lie outside the strict boundary of fiduciary regulation, the paper blends a historical, comparative, and unpublished case study research.
The literature survey and field research will describe the institutional evolution of pension system governance (not to be confused with retirement system assertions of stock ownership rights with respect to corporate governance). This history begins with the gratuity and progresses to current issues, such as individual property rights with respect to pension assets and benefits. In the U.S., the growing importance of pension funds as a capital source and the quality of decision making of boards that control those funds are becoming more central to the larger labor-management relations framework (inclusive of union and nonunion environments). By developing a historical perspective, the foundations for thinking about the evolving role of pension funds and retirement institutions in the broader labor and capital context can be illuminated.
Background
Pensions in the U.S. originated with the arbitrary granting of gratuities (or gifts) from employers to employees. As pensions evolved toward contractual commitments (promises) derived from employment service and as government regulation was imposed, the design, administration, and policy dimensions of governance became increasingly complex. The economic stakes have grown to immense proportions, currently about $10 trillion in assets in public and private plans in the U.S.
Even though there are very strict fiduciary standards for the boards that control pension plans, there remain many variations of control and areas of discretionary decision making. While the content will be primarily grounded in the U.S. experience, brief commentary and itemization of alternative institutional arrangements are articulated from an international perspective in order to extend the range of ideas for consideration.
Data/Methods
The paper will proceed from the global to the local level. For the former, a brief summary of pension governance in several countries will be developed. Additional commentary will underscore the main forces that will intensify the current shift from social insurance dependency to private sector pension plans. These are primarily the demographic patterns that make existing social insurance schemes unsustainable, and the increasing sophistication of capital markets in accommodating more flexibility in pension plans. Resources for this part of the paper will include some preliminary document review at the World Bank Library in Washington, D.C.
Next, a schematic of the evolutionary path of pensions in the U.S. will be described. Much of the archive research referenced in this section will be derived from visits to the AFL-CIO's George Meany Center Library Archives (Silver Springs, MD), from the TIAA/CREF Library (NY, NY), and from library materials reviewed from loans or online access.
Common themes from several case studies will then be summarized. These cases are primarily public sector plans from field research in Tennessee that included the state plan, county plans, and municipal plans. By the time the paper is presented the expectation is that some private plans may also be reviewed and included.
Expected Results
The prevailing labor economist's theory of pensions is that of deferred wages. However, this is an incomplete theory when considered in the context of ownership and control (such as in a private property context). Conventional thought also includes the conceptual contrasts of paternalism vs. choice in pension system governance. The expected results of this paper are not to refute, or even diminish, these well grounded views of pensions, but to articulate more unconventional perspectives that might enrich our thinking about the retirement institutions. As such, the paper will simply strive to offer a more cohesive and comprehensive framework for thought and practical implications for the future.
Discussion
The limitations of the U.S. model(s) of pension governance will be highlighted. For example, consider the spillover effects of partial privatization of Social Security, especially where Social Security retirement benefits are integrated with employer pension plans. How might boards adjust employer plans in response to these changes? How will voices of employees, retirees, and other beneficiaries be heard?
These kinds of questions often reduce to the need for deeper conceptual thinking about the nature of retirement systems, drawing in the pros and cons of arguments such as: property rights, democratization of pension boards, new standards of information access and disclosure of board decision making, management of legacy systems (e.g., from mergers, acquisitions, privatization, and consolidation), and reconfiguration of power relationships (state vs. corporations vs. employees vs. unions or other alliances).