Funds that have professionalized their investment organizations and boards get better results. The big Canadian pensions all have funded ratios above 90 percent (with most of the top ten above 98 percent), compared with the US average of 72 percent. And this difference is likely understated, as most Canadian pensions use more conservative discount rates to calculate liabilities than their US peers.

How do they do it? Our research1 has found that across all institutional investors, top performers display consistent strengths in five areas: the mandate, the governance model, the investment philosophy, the investment strategy and processes, and talent management. The mandate and governance model provide strategic direction and effective leadership toward the organization’s goals, while the investment philosophy, investment strategy, and talent management ensure that the investor capably executes its core function: putting money to work.

Better investment performance from highly capable organizations will not be enough on its own to eliminate the funding gap that America’s public pensions face. But it is a vital—and too-seldom discussed—component of the total solution. If pensions put their investment house in order, they can more credibly ask for major contribution and benefit reforms. In that way, they can bend the “third rail” of politics—the programs that support Americans in their old age. America’s state pensions should act now to stem the crisis, and improving investment performance is the right place to start.

Eoin Treacy's view

Governance really is Everything. Relying on outmoded ideas of how to generate sufficient returns to fund pension obligations, particularly in a zero interest rate environment is just not going to get the job done. I don’t think anyone is considering paying hedge fund type salaries to pension managers within a public framework but there is definitely merit to depoliticising the investment process for large funds with a focus on generating investment returns rather than further their political objectives.