Stupid reason #3916 for fooling around with stock investments

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A Pension for Security, Not Politics

By Alicia H. Munnell, January 31, 2013

Every few years, politicians come up with the notion of using public pension funds to make political statements.

The most recent incarnation is the effort to divest public pension and retirement plans from companies that make firearms. On Jan. 14, Chicago’s mayor, Rahm Emanuel, ordered a review of the holdings of the city’s public plans and asked their boards to take steps to end any investments in companies that manufacture or sell assault weapons. Days later, the Municipal Employees’ Annuity and Benefit Fund of Chicago voted to sell roughly $1 million in investments in three gun makers, including Freedom Group, the company that made the Bushmaster rifle used in the shooting rampage at Sandy Hook Elementary School in Newtown, Conn.

That move followed the one by the California State Teachers Retirement System, known as Calstrs, which voted in early January to begin to divest from firearms companies. Pension officials in New York, Connecticut and Massachusetts also say they are considering or beginning the divestment process.

Such responses have a powerful emotional appeal in the wake of the Newtown murders. And on a gut level, they might seem to make sense. But there are strong arguments not to use public pension plans to accomplish public policy goals. Divestiture will have no impact on the targeted companies and will create risks for already vulnerable plans.

First, the divestiture of gun stocks by a handful of public plans — or even by dozens of them — is unlikely to have a long-term impact on the share prices of these companies. The action may cause a temporary price drop, but as long as some buyers remain, they will swoop in and purchase the stock after the dip — and, if history is any indication, maybe even make money.

And the buyers are out there. The Vice fund, which was established in 2002, specializes in four sectors — alcohol, tobacco, gambling and military — and thus may stand ready to buy any stocks diverted from standard portfolios. Even the major anti-apartheid shareholder boycotts in the 1980s had no negative impacts on the valuation of banks or corporations with South African operations.

Second, public pension funds are particularly ill-suited vehicles for social investing. Adding a new criterion to the investment decision may increase the likelihood of mistakes. While the investment arms of many large public funds are first-rate, others are much less experienced. The boards of smaller funds often consist of about 10 people, including mayors, comptrollers, city council members, union leaders, retirees and citizens. The process is often conducted behind closed doors and subject to little public scrutiny. Introducing divestment requirements into such an environment may well take the manager’s eye off the prize: maximum returns for any given level of risk.

Finally, 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. The welfare of these future actors is not well represented in the decision-making process.

The last of these reasons is largely why the issue of divesting does not arise in private pension plans, which are governed by the Employee Retirement Income Security Act of 1974. Under the law, private plan fiduciaries may not “subordinate the economic interests [of participants and beneficiaries] to unrelated objectives.”

That should be the governing wisdom for public pensions as well. Their charge is to be good stewards of their participants’ assets. Anything beyond that is a potentially costly diversion.

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