Pension investment policies: why, how, and to what effect? Pension investment policies that thoughtfully address all of the elements in GFOA's recommended practice can go a long way toward helping public pension systems grow assets and deliver retirement benefits.(Best Practices)

The recent turbulence in the economy and the financial markets underscores the importance of having and adhering to a well-reasoned investment policy and strategy. In the years since the dot-com bubble burst, state and local government retirement systems that had clearly defined investment strategies weathered the storm, while those that did not are still trying to dig themselves out from the rubble.

GFOA's long-standing recommended practice, Public Employee Retirement System Investments, affirms that the fiduciaries of pension plans must invest plan assets for the exclusive benefit of plan participants. To reinforce the importance of investment decisions, GFOA recommends that, consistent with state statutes, pension plans establish formal, comprehensive investment programs operated by competent professionals and monitored objectively by oversight boards and committees.

In 2003, the GFOA Executive Board approved a new recommended practice, Pension Investment Policies, which provides additional guidance on pension investing. State and local entities are strongly advised to develop and follow a formal investment policy that is approved by the pension plan's governing board or trustees. A pension investment policy should be viewed as a long-term governing document, be designed with longterm issues in mind, and not require frequent amendment.

PENSION INVESTING IN THE CITY OF KALAMAZOO

Prior to 1981, the City of Kalamazoo, Michigan, used an investment adviser to manage pension plan assets. The adviser made buy and sell recommendations to the pension board. If the board agreed with the recommendations, it would then submit them to the City Commission for final approval. Under this arrangement, the process of buying and selling investments could take weeks. The city lacked both written investment policies and a clearly defined investment strategy by which the Board of Trustees and the City Commission could judge the performance of the investment adviser. Not surprisingly, the pension plan was only 65 percent funded at the time. As a result, the City Commission asked for a thorough review of the pension plan's investment practices and received the following recommendations:

* The city should establish an Investment Committee to oversee the investment of pension plan assets. The Investment Committee should be accountable to the City Commission.

* The Investment Committee should define the retirement system's investment objectives, policies, and strategies, and should have the authority to carry out those objectives, policies, and strategies once formally approved by the City Commission.