6. Setting Direction and Policy
Adapted from “Transforming the Dialogue: Fiduciary Essentials” by Frederick (Rick) Funston. Amazon, 2025
“The best way to predict your future is to create it.”
Why Strategic Direction Matters
As a trustee of a public retirement system, you’re in a position of great responsibility: ensuring the financial security of public employees long after they retire. You're managing other people’s futures—promises made long before you joined. This makes setting the right strategic direction incredibly important.
Your strategy isn’t just a static plan you file away—it’s a dynamic guide that helps your board make decisions, manage resources, and provide stable, equitable retirement benefits for generations to come.
Seven Strategic Focus Areas for Public Retirement Systems
Here’s what you should keep top of mind:
Pension Soundness: Ensure long-term financial health with balanced contributions, sound investments, and careful risk management.
Service Excellence: Provide accurate, timely, and member-focused services using modern technology and efficient operations.
Governance and Accountability: Build trust through transparency, ethical standards, and proactive communication with stakeholders.
Investment Strategy: Balance risks and returns with diversified portfolios that support immediate and future obligations.
Adapting to Change: Stay agile, responding proactively to demographic shifts, economic challenges, and evolving political landscapes.
Innovation and Modernization: Regularly update technology, streamline processes, and use analytics to improve member services.
Stakeholder Trust and Equity: Ensure fairness and transparency so stakeholders trust that the system is equitable across generations.
Key Questions for Effective Direction and Policy Setting
Here are ten important questions trustees should always be asking:
1. What are our main responsibilities when setting policy?
Your board is responsible for setting the retirement system’s strategic direction, investment policies, funding approaches, benefit structures, risk management, and compliance practices. Balancing these competing priorities is crucial.
2. How do we set our strategic direction and policies effectively?
Strategic direction-setting is a collaborative, long-term process involving stakeholders. Regularly revisit your strategic plans, updating them to meet evolving challenges and opportunities.
3. How should we approach investment policy?
Overseeing investments is critical. Your goal is to achieve solid returns while minimizing risks. Clearly define your beliefs about investing, determine your asset allocations carefully, and monitor regularly to stay on track.
4. What are our key funding policies and actuarial assumptions?
Funding policies set how much employees and employers contribute, balancing sustainability and fairness. Actuarial assumptions—like life expectancy and salary growth—must reflect reality and be regularly reviewed to keep your plans solvent.
5. What role do we play in shaping benefit policy and plan design?
Your influence here depends on your specific legislative framework. Often, boards have limited authority in shaping benefits directly, but play a crucial oversight role to ensure long-term financial health. When they do have control over factors such as retirement age years, if service and COLA, the board can become politicized.
6. How do we ensure compliance with regulations?
Transparency and accountability aren’t just ideals—they’re requirements. Establish policies that ensure compliance with laws, reporting standards, and ethical guidelines, protecting your system’s integrity.
7. How do we effectively oversee performance and risk management?
Risk management isn’t a set-and-forget task. Regularly evaluate your exposure to financial, operational, actuarial, and reputational risks, adjusting policies proactively to safeguard the system.
8. How will we engage stakeholders?
Regular communication is key. Set clear policies for informing stakeholders about system health, policy changes, and contribution adjustments. Transparency builds trust and credibility.
9. How will we adapt to external pressures?
Change is inevitable. Develop proactive strategies to handle economic, demographic, political, and legislative pressures—staying resilient and responsive to shifts in your external environment.
10. How do we continuously improve?
Keep learning, reviewing, and updating your policies. Gather feedback, stay informed about industry trends, and ensure your governance evolves to meet the future.
Strategic Planning vs. Day-to-Day Business
Think of strategic planning as steering the ship—focusing on the long-term course. It’s different from annual business planning, which deals with operational details like budgeting. Effective strategic plans look ahead five to seven years, setting a clear path that guides everyday decisions.
Regularly revisit your strategic plan to adapt to changes and new insights, making sure it remains relevant and effective.
Setting Investment Beliefs: Your Investment Compass
Your investment beliefs are the guiding principles shaping your investment decisions. They clarify assumptions about markets, diversification, costs, and risks. A clear statement of investment beliefs ensures decisions stay consistent, even in volatile markets, improving oversight and potential returns.
Examples of widely adopted beliefs include:
Markets are mostly efficient over the long term.
Diversification reduces risk.
Costs matter—a lot.
Regularly review these beliefs to stay aligned with new evidence and changing conditions.
Key Tools for Overseeing Investment Management
Three tools are essential for pension investment management:
Investment Beliefs: Your guiding principles for making investment decisions.
Asset Allocation: Balancing your investments across different asset types to manage risk and returns.
Investment Policy Statement (IPS): The detailed document outlining your objectives, risk preferences, asset allocation, and oversight procedures.
Think of the IPS as your investment “North Star”—it guides decisions, sets boundaries, and helps ensure everyone stays aligned. Regularly revisit your IPS to adjust your course as needed.
Navigating Corporate Governance and Proxy Voting
As trustees, you influence corporate behavior through proxy voting. By voting shares in companies your system invests in, you help shape corporate practices on issues like executive pay, board diversity, and sustainability (ESG).
Good corporate governance ensures transparency, accountability, and long-term value creation— critical for pension funds relying on stable returns.
Understanding Private Equity Investments
Private equity (PE) involves investing directly in companies to improve their performance and sell them for profit. While offering high returns and diversification, PE comes with higher risks, complexity, and fees.
When investing in PE:
Understand different strategies (e.g., buyouts, venture capital).
Be clear about costs (management fees, performance incentives).
Recognize the liquidity and risk challenges.
Careful due diligence is essential to succeed in private equity investing.
Lessons Learned About Setting Direction and Policy
Choosing the right CE is pivotal. Consider long-term goals, required skills, cultural fit, and leadership qualities. Clearly define expectations upfront, conduct regular evaluations, and provide continuous feedback.
Evaluation should include:
Clear annual goals set collaboratively.
Ongoing, constructive feedback.
Emphasis on strategic thinking, adaptability, and responsiveness to change.
Succession planning, including emergency transitions, help to assure long-term stability.
Regular Board Self-Evaluation: Continuous Improvement
Strategy is Essential: Strong strategy guides your board to long-term success.
Regular Reviews: Continuously review and update your policies and strategic plans.
Investment Beliefs Matter: Clear investment beliefs help maintain consistency and oversight.
Asset Allocation is Key: Balancing risk and return across assets greatly impacts success.
Proactive Risk Management: Always prioritize managing risk effectively.
Engage Stakeholders: Clear communication and transparency build trust.
Corporate Governance Counts: Proxy voting influences long-term corporate behavior.
Private Equity Awareness: Understand the complexity, risks, and costs of PE investing.
By thoughtfully setting your direction, defining clear policies, and regularly adapting your strategy, your board can secure the financial future of countless public employees—today and for generations to come.
Want to learn more?
Board Smart subscribers, explore these resources:
Setting Direction and Policy Essentials
Corporate Governance and Proxy Voting
The Basics of Private Equity Investing
Strategic Planning for Boards
Investment Beliefs and Asset Allocation
Actuarial Basics for Defined Benefit Plans
Annual Required Contributions
Environmental, Social, Governance Webinar
Corporate Governance Webinar
Keep steering your system confidently toward a secure future.
Contact rfunston@funstonadv.com or Slussow@boardsmart.com
Click here to order “Transforming the Dialogue: Fiduciary Essentials.”
