A politician wants less power? NC will benefit from a smart, selfless treasurer call | Opinion

The Treasurer of North Carolina is the sole trustee of the state pension plan. That means he is in control of $120 billion that assures the retirement security of more than a million North Carolina public sector workers. Fortunately, the current occupant of that office, Brad Briner, has a lot of experience in managing billions of dollars.

Briner campaigned on and has requested legislator end the state’s “sole trustee” model, removing the treasurer’s sole investment authority, a proposal that’s in the North Carolina Senate’s budget bill.

Why is Treasurer Briner trying to give up that awesome power? Since when do politicians ever give up power?

The answer: He wants the North Carolina Retirement Systems to have better “governance.” Now, I know that ”governance” may sound like an academic, make-your-eyes-glaze-over concept, but proper governance can make a very important difference in the outcome for these billions of dollars destined for retirees’ pensions.

Dozens of studies have demonstrated that better governance results in better outcomes. One study concluded that better governance can be worth 1-2% of additional return per year.

Now, why would this be the case? Why would better governance be likely to produce better results?

Two potential reasons are difficulty keeping a long-term focus and electoral politics.

If there is only one trustee, he or she will set the asset allocation for the pension plan. This means determining what risks the pension is willing to take over what time frame. It includes the determination of how much of the plan’s assets aren’t easily converted to cash, also known as being illiquid, what percentage should be risk-taking or risk-reducing and how often to adjust to the original targets as markets outperform or underperform. It includes allocating to certain investments that will likely perform poorly in certain market environments because they diversify the portfolio and perform well in other market regimes.

These policies are meant to be long-term policies. Many illiquid investments have higher returns, but they require that the plan stay invested for eight or ten years. In the sole trustee model, the treasurer is elected for four year terms. If we have a new treasurer every four or even every eight years, think of the difficulty of staying with any asset allocation policy for the long term.

However, a board with staggered terms addresses this concern. There would always be a majority of the board with institutional memory and a degree of commitment to the asset allocation that is already in place. This is not to say that asset allocation policy should never change. Rather, it should not change just because there is a new treasurer.

Quick example: When I was the director of the United States Pension Benefit Guaranty Corporation (PBGC), a federally created organization that protects pensions, we spent a year developing a new investment policy. But the board of the PBGC and the director all ended their terms at the same time. The new board froze the implementation of the new policy and cost the PBGC over $10 billion. Staggered terms would have prevented that result.

The assets of a state pension plan should be invested for the sole benefit of the present and future retirees who have worked for the benefit of the public. This is a fiduciary duty.

But when elected officials have sole discretion on investments, politics can play a role. Remember when Tesla was considered an important stock to own because electric vehicles were good for the environment? And now, if you don’t approve of Elon Musk’s budget cutting, you may want to sell Tesla stock or even root for it to go down. For a politician, those can be attractive positions to win votes. But these positions should play no role in the fiduciary decisions made when investing billions of dollars for the retirement security of more than a million workers and retirees.

Another political decision can be to “fight” Wall Street. It can be politically attractive to pay the lowest fees to outside investment managers. This was the position of the prior North Carolina treasurer. The lowest fees, however, have resulted in the lowest returns of any state pension plan in the United States. In short, you get what you pay for.

One can think of any number of political factors that can be attractive for the politician but that should not be part of a fiduciary investment decision. It can be difficult for an elected official, especially one who is a sole trustee, to resist these positions. No surprise, then, that it is pretty unusual for a politician to suggest shrinking his own influence. But as a fiduciary, Treasurer Briner recognizes that this is in the best interests of the public servants he serves.