Public Pension Plan Investing
A recent primer by the National Institute on Retirement Security (NIRS) offers insights to a typical public pension investment process.
By all accounts, it is a process not widely understood and often criticized, especially in regard to the amount of risk public pension funds are believed to be taking, and the investment return assumptions they use to calculate liabilities and required contributions. (As a side note, for the period ending Sept. 30, 2012, the last 10-, 20-, and 25-year periods, median public pension fund returns have met or exceeded their expected long-term investment returns.)
As NIRS points out, setting an asset allocation in a diversified portfolio is a rational and systematic process. Of these policies, a Government Finance Officers Association best practice states:
The pension system should establish ethics policies that contain high standards for impartiality and that require trustees and staff to refrain from making investment decisions based on personal or political reasons, or appearing to do so.
A news account of trustees of the Austin Police Retirement System illustrates the importance of making decisions based solely on the interests of plan participants.
Regarding political reasons or to achieve societal objectives, the questions can become heated. One columnist questioned: should government entities, state, municipal and local pension funds have some responsibility to their citizens? The answer to this question is yes, of course, government entities should have responsibility to their citizens. That is the job, after all, of government: to serve the citizenry.
Public pension funds are different: the assets of these funds are the property of the participants of the plan, and those entrusted to invest those assets are fiduciaries, responsible for operating solely in the interest of those participants. As much as we might like to effect social goals, using the retirement assets of others is inappropriate way to go about it.
Last week the Seattle City Employees’ Retirement System discussed selling its holdings in some of the world’s biggest oil and gas companies because of the threat posed by climate change.
Another divestment topic is gun manufacturers.
Following the Newtown tragedy, many public pension representatives announced they were considering divesting their holdings in gun makes. New York State Comptroller Thomas DiNapoli stated he was weighing options, but that “we can’t manage the pension fund based on whatever the hot issue of the moment is.” In a meeting the week with the Newsday editorial board, he elaborates:
Alicia Munnell of the Center for Retirement Research at Boston College reiterates that the purpose of an investment policy is “maximum returns for any given level of risk.”
Likewise, columnist George Will points out that divesting (in this case, by the Chicago pension funds) will have no effect on the targeted companies: “not one fewer gun will be made, sold or misused because Chicago is wagging its finger at banks.”
The key, according to NIRS, is that pension fund trustees exercise “the legal and ethical responsibility to manage the fund for the exclusive benefit of the workers and retirees who participate in the fund.” Ms. Munell elaborates:
The people advocating for divestiture and the stakeholders are not the same people. The advocates for divestiture are either the fund board or the politicians. The stakeholders are tomorrow’s beneficiaries and taxpayers. If divestiture produces losses either through higher administrative costs or lower returns, tomorrow’s taxpayers will have to ante up or future retirees will receive lower benefits.
There are enough difficult questions in pension fund management such as how to allocate a pension fund’s assets, or what is the appropriate expected rate of investment return. Other questions, like should the pension fund be used for individual gain or to advance desirable social objectives, should be easy.