It is no secret that the U.S. and China have recently experienced diplomatic tensions, but we now see its effects bleeding into the financial sector. The Department of Labor (DOL) recently announced a rule change to the Employee Retirement Income Security Act of 1974 (ERISA) dictating that pensions should not be used to solve the world’s problems through Environmental, Social, and Corporate Governance (ESG) investing. Similarly, Labor Secretary Scalia ordered the Thrift Savings Plan (TSP) to not include Chinese companies in its investment options within the I Fund. It is important to note that the I Fund is an international stock index that tracks the investment performance of Morgan Stanley Capital International: Europe, Australasia, and the Far East Index, also known as the MSCI EAFE.
In his letter, Secretary Scalia states that changing the tracking index from the MSCI EAFE to MSCI All Country World ex USA Index would place billions of dollars “in risky companies that pose a risk to U.S. national security.” In the same fashion, Chairman Clayton of the U.S. Securities and Exchange Commission (SEC) warned in April that Chinese disclosures are sparse and that investors should be cautious when considering Chinese equities.
Although the Employee Thrift Advisory Council has labeled discussions on the I Fund as partisan, members of Congress from both sides of the aisle have argued that investing in China would be a danger to U.S. national security. They note:
“The constituent firms of MSCI ACWU ex-US IMI include military contractors to the People’s Liberation Army, like the Aviation Industry Corporation of China and China Unicom, which supply military aircraft and telecommunications support to militarized artificial islands in the South China Sea. It also includes firms like Hangzhou Hikvision Digital Technology, which was recently added to the U.S. Department of Commerce’s Entity List and produces surveillance equipment the Chinese government currently uses to oppress and detain approximately one million Uighur Muslims and other religious minorities, as well as ZTE Corporation, which was fined last year for violating U.S. sanctions law for business activity with Iran and North Korea and which Congress has enacted a law to prohibit the U.S. federal government from procuring.”
Along with the White House’s decision to end a new China-inclusive benchmark, the Federal Retirement Thrift Investment Board (FRTIB) voted to delay implementing a new index for the I Fund which would give opportunity for foreign investment. The White House is currently in the process of nominating new members to the Thrift Board.
A new Trump-nominated majority on the Thrift Board may be indicative of future U.S. economic policy towards China. These recent moves on the hands of both Democrats and Republicans raise several questions: Should our pension system should be treated as a chess piece in U.S. foreign policy? Is our return on investment greater than threats posed by foreign adversaries? The Institute for Pension Fund Integrity (IPFI) believes that these sorts of decisions, whether or not to keep China out of TSP’s I Funds, must be guided by data-based conclusions around the long term growth of our pension funds.