Why an Investment Policy Statement is critical to effective municipal pension plan management

Gregg Daily,AIF®
Manager, Institutional Investment Accounts

Municipal managers and officials have many responsibilities when it comes to administering their pension plans. One of the most important elements of a municipal pension plan is the Investment Policy Statement (IPS). Those who work with foundations and endowments – or any organization that has a pool of resources invested to meet a specific purpose – must familiarize themselves with this document.

What is an IPS?
An IPS outlines the process for properly determining roles and responsibilities, reporting, measurement of outcomes, and how and why to select certain types of investments and investment managers. All of which is designed help to meet certain goals for the pension plan. The success or failure of accomplishing these goals has an impact on other aspects of the plan as well. If the investments don’t accomplish what they are intended to do, then a municipality might need to increase overall funding to make up the difference.

Why can’t we just increase the funding?
Experience and attention to current events suggest that it is not always that simple in today’s environment. Sometimes increased funding is either not a realistic option or can’t be done consistently enough to solve the particular problem. Exactly how and where that funding will come from are issues not easily resolved.

What role does the IPS play in all of this?
When its function, design and impact on outcomes is thought out and understood, an IPS provides the best chance for your investment allocation to accomplish the goals that will make the plan work on a long-term basis. While the IPS itself is not a magic formula for success, you have a much better chance of meeting your plan goals if:

  1. You properly research how an IPS should be structured; and
  2. You understand the dynamics of how costs, asset allocation, risk, risk measurement and investment selection are all tied together in the pursuit of meeting your objectives.

Moreover, an IPS must create a system of monitoring and accountability that determines what data to collect, how it will be collected, who will be responsible for monitoring it and how to compare information on expenses, performance and outcomes

Investment policy is a process, not a set it and forget it situation. Like any process, it must be reviewed often enough to ensure continued understanding of its ability to drive outcomes, and adaptable enough to change if those outcomes are not being met.

At Fragasso, we have seen the importance of proper design, implementation and maintenance of an IPS in our work with organizations of all different types, including municipal pension plans. We’ve made it a point to help guide our clients in creating a document that serves their needs, using our experience and understanding of process design and goal-driven investment management.

We’re here if you’d like to talk about how to make your IPS more effective. Because if it’s working, then your municipal pension plan has a better chance of working for the important individuals and families it seeks to cover and subsequently support in retirement.


Gregg Daily is Manager, Institutional Investment Accounts at Fragasso Financial Advisors, a Pittsburgh-based investment and financial planning firm.  Due to industry regulations, comments are not permitted on this blog.  If you would like to contact the author, please email us at blog@fragassoadvisors.com.  Gregg can also be reached for comment at 412-227-3200.

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