Objective. Public-sector pension plans are managed in diverse ways, with go
vernance policies distinguished according to how the plan's board is compos
ed, how the trustees structure their investment decisions, what restriction
s are placed on investments, and whether there are independent performance
evaluations. We examine how these governance policies affect pension invest
ment strategies, and how those strategies in turn affect the funds' financi
al performance. Methods. Drawing on two national surveys of state and local
public retirement systems in 1992 and 1993, we ask if pension governance p
olicies affect whether the retirement systems (1) invest tactically in resp
onse to changing conditions; (2) allocate assets between equities and fixed
-income holdings; (3) contract for external asset management; and (4) inves
t outside the U.S. Results. Empirical analysis reveals that governance poli
cies-especially independent performance evaluations-predict investment deci
sions in all four areas. These investment strategies in turn are found to a
ffect subsequent fund performance: preferential investing in equities and a
broad increased annual returns on assets by as much as 1 to 2 percentage po
ints. Conclusions. The ways that public pensions are governed have a direct
bearing on how they invest their assets, and the investment strategies in
turn directly affect the financial performance of their holdings.