The Singular Role of Public Pension Funds in Corporate Governance

With more than $5 trillion in assets, public pension funds are significant players in financial markets. Like private asset managers, public pension fund managers are typically expected to exercise their discretion over investing and engagement to serve the interests of the funds’ beneficiaries exclusively, a model that we term “beneficiary primacy.” To this end, beneficiary primacy imposes fiduciary duties on fund managers to maximize the economic value of the fund. We argue that the application of beneficiary primacy to public pensions is wrong. It misapprehends the nature of public pension plans and leads to misguided public policy. Public pension funds differ from private funds along a variety of critical dimensions. Most importantly, their beneficiaries receive a defined benefit that does not vary based on the fund’s economic performance, and their investment policies are subject to political and market accountability.

Because of these differences, we maintain that public pension funds should be understood as principals serving a broader public interest that is informed by the goals and values of plan beneficiaries, public employees, taxpayers, government officials, and local communities. In serving as agents for the fund–and not its beneficiaries–fund managers can and should balance the sometimes-competing interests of the fund’s multiple stakeholders. The most significant consequence of our retheorization of public pension funds is that their managers would no longer have a narrow mandate to focus exclusively on maximizing portfolio value.

Beneficiary primacy is problematic because it delegitimizes values-based fund management decisions. Under the beneficiary-primacy model, fiduciary principles create litigation risk for fund managers who include environmental and social values or local interests in their investing and engagement activities. Beneficiary primacy has also led prominent commentators to criticize the political dimension of public pensions and to suggest ways to better align fund manager incentives with economic value creation.

But the political nature of public pensions is a feature, not a bug. As principals with a uniquely public dimension, public pensions are valuable players in financial markets and corporate governance and provide a distinctive source of accountability for corporate leadership. Unlike private asset managers, public pension funds have embraced their role as engaged owners. They also give voice to typically disenfranchised groups and provide a mechanism for incorporating public objectives into the capital markets.

Once we recognize the distinctive structure and singular role of public pension funds, it becomes clear that fund managers should not be constrained by inapposite fiduciary principles but instead should invest and engage in accordance with the broader interests they represent, interests that include dimensions of both economic value and societal values.