Mastering Governance: The Role of Strategic Delegation in Investment Programs of Public Pension Plans

Mastering Governance: The Role of Strategic Delegation in Investment Programs of Public Pension Plans
August 25, 2025 10 mins

Mastering Governance: The Role of Strategic Delegation in Investment Programs of Public Pension Plans

Public Fund Delegation

How public funds can examine their situations, and if the decision is made to delegate, how to do so prudently.

Key Takeaways
  1. Public pensions are increasingly considering delegating responsibility for investment manager selection.
  2. The duty of prudence expects boards to delegate certain responsibilities.
  3. Approaches should have clearly defined processes, parameters, and reporting requirements.

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Executive Summary

Public pension trustees have a crucial role in the oversight of plan assets, a role that requires a great deal of expertise, resources, and tools to do prudently. One such tool is the delegation of investment manager selection, a practice increasingly under discussion at the investment committee and board levels of many public funds. The goal is to establish an effective and efficient selection process that gives the board more time to focus on high level policy matters, while giving staff and/or external advisors the flexibility to make timely investment decisions in the best interests of the fund’s participants and beneficiaries. However, effective delegation must be accompanied by robust reporting and monitoring frameworks so that the board, the ultimate fiduciarily, can fulfill its fiduciary duty to monitor the delegation. This paper provides an overview of how public funds can examine their situations, and if the decision is made to delegate, how to do so prudently.

Delegation Overview and Best Practices

The duty of prudence not only permits but also expects boards to delegate certain responsibilities. Delegation is a fundamental aspect of sound governance that allows for more efficient and effective decision-making. It involves assigning specific responsibilities to individuals or groups with the expertise to handle them. For public funds, this often means delegating certain investment decisions to qualified agents, which could be staff and/or advisors, while maintaining overall oversight. The delegation process should be clearly documented, with well-defined roles and responsibilities, to ensure accountability and transparency. The board’s “sign-off" on the process is crucial, ensuring that all parties understand their duties and the resources available to them. A structured approach helps ensure that delegation enhances, rather than diminishes, the board’s ability to act in the best interests of plan participants and beneficiaries.

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Some plans use an Outsourced Chief Investment Officer (OCIO) model, which is when an outside firm is delegated discretionary responsibility for investment manager selection, among other operational duties (such as rebalancing). An OCIO model is more often used by plans with a lean investment team or plans with no dedicated investment team at all.

Bryan Ward
Head of U.S. Investments, Aon Investments USA Inc. North America

Necessary Elements for Responsible Delegation

To ensure prudent delegation, several elements must be in place:

  1. Sufficient Resources: Both internal and external resources must be understood by the board before it can appropriately delegate. This includes assessing staff capacity, expertise, and operational capability. Regular reviews of these resources are essential to maintain confidence in their effectiveness.
  2. Appropriate and Clear Parameters: The scope of delegation must be explicitly defined. The ultimate approval process and how final decisions are made must be clearly outlined. The board can either fully delegate, or set clear parameters, such as asset class limitations and/or portfolio percentage or dollar thresholds for new or existing managers.
  3. Robust Process for Manager Selection: Under a delegated model, roles and responsibilities and the process and procedures for manager selection must be well-defined to avoid confusion and overlap, and to ensure accountability.
  4. Monitoring Standards and Expectations: When a board delegates, it does not abdicate its responsibility to monitor those who have the delegated responsibility. Defined reporting standards are necessary to fulfill oversight duties. The board must regularly review the delegation process to ensure it remains appropriate. Reporting requirements must clearly define the frequency of updates, level of detail needed, and types of reports required. It is often prudent to have independent reviews of the delegated responsibilities, whether by the board’s investment consultant or another third party.
  5. Board Action: The board must approve the delegation and monitor to ensure the delegated action continues to be prudent. The board retains the authority to rescind or change the delegation as it deems necessary.

Benefits and Considerations of Delegation

Delegation offers several benefits, including more efficient and expeditious investment decisions, greater flexibility for experts to complete their duties, and more time for the board to focus on higher-priority items such as asset allocation and policy decisions. If implemented correctly, delegation can enhance fiduciary oversight and risk management by holding delegated activities to specific processes and standards, including reporting requirements.

However, delegation is not without risk. Reduced participation from the delegating body (board or investment committee) can lead to complacency in oversight and monitoring over time. To mitigate these risks, it is essential to set appropriate parameters and procedures, conduct regular reviews, and ensure transparency and concurrence from all parties involved.

How Public Funds are Delegating

Unless prohibited by law, public funds can delegate the authority to make investment decisions when prudent in their informed opinion. Delegation works best when roles and responsibilities, reporting requirements, thresholds, and expectations are clearly defined from the onset. The Investment Policy Statement (IPS) can include policy language regarding delegation, defining responsibilities for manager due diligence, selection, monitoring, and termination.

Whether the delegation is memorialized in the IPS or in a separate document, the delegation should be reviewed on a set frequency, such as annually or bi-annually, to ensure it continues to be prudent. This does not preclude the board from reviewing the appropriateness of the delegation any time the board desires while also ensuring that the monitoring is documented and fulfilled.

Monitoring options at the board level commonly include quarterly manager update reports, quarterly performance reports, and periodic asset class reviews. These reports can provide updates on manager additions, terminations, rebalancing, total fund performance, sub-portfolios/asset classes, and managers.

Public pension funds have varying levels of delegation. State plans, which tend to have sizable assets, often have large internal investment teams working with outside consulting firms to determine investment manager allocations. These plans also often have at least some degree of delegation of manager selection, most often to the internal investment team. Municipal plans, which have fewer assets, tend to also have smaller investment teams. Where delegation exists with these mid-size plans, it is more common for them to fully or partially use third-party advisors. A common delegation for mid-size plans is to a discretionary advisor for private market asset classes, such as private equity, which can be very resource intensive. Some plans use an Outsourced Chief Investment Officer (OCIO) model, which is when an outside firm is delegated discretionary responsibility for investment manager selection, among other operational duties (such as rebalancing). An OCIO model is more often used by plans with a lean investment team or plans with no dedicated investment team at all.

There is no one-size-fits-all solution, and the level of delegation largely depends on the comfort level with the delegating body and the processes and resources in place. Aon recommends selecting a model that works best for all constituents involved, ensuring transparency and buy-in on processes and procedures. An approach with clearly defined processes and parameters, and robust reporting requirements, can lead to a successful delegation model.

Level of Delegation Delegation Option Description Final Approver Constraints
None Board retains full authority All manager selections are made directly by the board Board
Low Board delegates to investment committee Staff propose manager selections, subject to approval by the investment committee (not the full board) Investment committee - board adopts through consent agenda The board could pull the consent agenda for discussion if desired.
Medium Staff selects managers with external consultant concurrence Staff proposes selections, but decisions require agreement from an external consultant Staff with consultant concurrence Potential Restrictions:
Limited to some asset classes

Limited by a percentage or dollar-based threshold

Potential Rescission triggers:
Delegation rescinded if staffing levels fall below a threshold

Delegation rescinded if CIO, investment consultant, or third party advisor for particular asset class is replaced

Reviews:
Must be within approved pacing plans

Subject to annual review process and board approval
High Staff or third party advisor selects managers independently Staff or third party advisor has full discretion over manager selection Investment team or third party advisor

Conclusion

Delegation is a significant decision. For plans interested in exploring potential benefits of delegation, appropriate next steps often include 1) ensuring Trustees are conversant with prudent delegation and the current selection process, 2) discussing potential options for delegation, and 3) creating policy and process documents for board review.

By clearly defining roles and responsibilities, setting appropriate parameters, and establishing robust monitoring and reporting requirements, a public fund can enhance its fiduciary oversight and risk management. Regular reviews and transparency are essential to maintaining the effectiveness of the delegation process, ensuring that it continues to align with the public pension plan’s strategic goals and objectives.

Contact Us

Julie Becker
Aon Fiduciary Services Practice Leader/Public Sector Fiduciary & Governance Solutions Leader
Aon Consulting Inc.
[email protected]

Katie Comstock
Public Sector Solutions Leader
Aon Investments USA Inc.
[email protected]

General Disclaimer

The information contained herein and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information and use sources we consider reliable, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Information contained herein is for informational purposes only and should not be considered investment advice. Investment advice and consulting services provided by Aon Investments USA Inc. (Aon Investments). Consulting services provided by Aon Consulting, Inc. (“ACI”). The information contained herein is given as of the date hereof and does not purport to give information as of any other date. The delivery at any time shall not, under any circumstances, create any implication that there has been a change in the information set forth herein since the date hereof or any obligation to update or provide amendments hereto. This document is not intended to provide, and shall not be relied upon for, accounting, legal or tax advice or investment recommendations. Any accounting, legal, or taxation position described in this presentation is a general statement and shall only be used as a guide. It does not constitute accounting, legal, and tax advice and is based on Aon Investments’ understanding of current laws and interpretation. This document is intended for general information purposes only and should not be construed as advice or opinions on any specific facts or circumstances. The comments in this summary are based upon Aon Investments’ preliminary analysis of publicly available information. The content of this document is made available on an “as is” basis, without warranty of any kind. Aon Investments and ACI disclaim any legal liability to any person or organization for loss or damage caused by or resulting from any reliance placed on that content. Aon Investments and ACI reserve all rights to the content of this document. No part of this document may be reproduced, stored, or transmitted by any means without the express written consent of Aon Investments and ACI. Aon Investments USA Inc. is a federally registered investment advisor with the U.S. Securities and Exchange Commission. Aon Investments is also registered with the Commodity Futures Trading Commission as a commodity pool operator and a commodity trading advisor, and is a member of the National Futures Association. The Aon Investments ADV Form Part 2A disclosure statement is available upon written request to the contact information provided below. In Canada, Aon Solutions Canada Inc. and Aon Investments Canada Inc. (“AICAN”) are indirect subsidiaries of Aon plc, a public company trading on the NYSE. Investment advice to Canadian investors is provided through AICAN, a portfolio manager, investment fund manager, and exempt market dealer registered under applicable Canadian securities laws. Regional distribution and contact information is provided below. Aon Investments USA Inc. 200 E. Randolph Street Suite 600 Chicago, IL 60601 ATTN: Aon Investments Compliance

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