At the end of June, word was coming out of Washington that there could be a second stimulus plan coming. President Trump and Treasury Secretary Mnuchin both voiced optimism that the second round of COVID-19 relief would be imminent. Sure enough, it is reported that next week the second plan, the HEROES Act, will be introduced to the Senate after passing the House approximately a month earlier. Part of this massive relief plan is the Emergency Pension Plan Relief Act of 2020. Simply put, it is a bailout for single and multiemployer pension plans.
The Emergency Pension Plan Relief Act of 2020 (EPPRA) would double the Pension Benefit Guaranty Corporation (PBGC) maximum benefit level. Currently, the maximum is 100% of the first $11 of the monthly benefit rate, plus 75% of the next $33 of the monthly benefit rate, times the years of credited service. This means a 30 year employee receives $12,870 annually, or $17,160 for a 40 year employee. Under this act, those limits would be raised to $24,300 and $32,400. The act also reinstates cuts that have been made by firms that were about to deal with insolvency. Furthermore, cuts made by the Multiemployer Pension Reform Act (MPRA) of 2014 wouldn’t be in effect either. The major problem with the entire act is that all of these benefit cuts are being rolled back without a reciprocal increase in contributions by those who have pension plans. Most of the funding would come from the federal government. Other things done in the EPPRA are the authorization of composite plans — a multiemployer plan that combines defined benefit plans and defined contribution plans, — accounting relief, special partition relief and an extension of funding improvement and rehabilitation periods
While it is essential that the American economy is guided back on the right course, this shouldn’t be an excuse for handouts as a stop-gap measure to remedy underlying problems. The burden taken on by the federal government will end up being paid off by the nation’s population. Pension fund relief and reform is not something that is taken lightly. Conscientious work and deliberations should be had so the problem can be addressed comprehensively and effectively.
The fate of the EPPRA is unclear at this moment, but however it must be noted that the pension fund issue has caught the eye of elected officials in both parties. This means that no matter the outcome of the EPPRA, it is expected that new pension legislation will come to the House and Senate floors soon.
Earlier this month, the Rhode Island Supreme Court ruled on a case with significant long-term implications for Providence’s critically underfunded pension system. The court reversed a 2012 city pension reform act, effectively prohibiting cities in Rhode Island from executing pension reform without the consent of pensioners. City leaders voiced their disappointment regarding the outcome, some suggesting that the city may have no choice but to consider declaring bankruptcy.
Providence’s pension system, which serves over 3,200 retirees, has been a subject of great concern for policymakers for decades. The City’s retirement fund remains only 26.3% funded, with its unfunded obligations exceeding $1.3 billion. As of November 2019, Providence’s pension fund, along with 20 other municipal plans across the state, sat in “critical” status. According to Rhode Island General Treasurer Seth Magaziner, pension funds underfunded by at least forty percent receive this classification.
In 2011, Providence’s then-Mayor, Angel Taveras, pushed for city-wide reform to recover from what he referred to as “pension abuse.” Mayor Taveras believed Providence could save $16 million annually by freezing COLAs. Cost of living adjustments, or COLAs, change a pension recipient’s monthly retirement benefit to account for increasing prices and to ensure that their purchasing power remains the same. In Providence, however, generous COLAs contributed to the city’s looming economic collapse. The most frequently used example of Providence’s generous COLAs is Fire Chief McLaughlin, who retired in 1992 with a tax-free disability pension when his salary was $63,500. He received a compounded 6% COLA and, by 2013, his pension soared to $196,800.
Mayor Taveras’s administration passed an ordinance that suspended cost-of-living adjustments until Providence’s pension fund reached a 70% funding level. Taveras argued the freeze was only a temporary change to the pensions of public employees. Retiree groups and unions agreed to a 10-year suspension, however, the fund was not projected to reach the targeted level of funding until 2036. A lower court ruling previously upheld the freeze, until earlier this month when the Rhode Island Supreme Court presided over the case.
The Court ruled that “if the pension plan for city employees and retirees is changed by the courts, it can’t be changed again by the City Council” unless changes are agreed upon by pensioners. The majority opinion was written by Chief Justice Suttell, who concluded that each plaintiff definitively proved that they were entitled to the full benefits they were promised by the city. Additionally, the court decided that the suspension of COLAs could not be considered temporary because, according to William B. Fornia, an expert in actuarial science as it relates to municipal pensions, testified that over half of the plaintiffs whose COLAs were frozen will have died by the time the retirement system achieved 70% funding. Following the Supreme Court’s decision, Fire Chief McLaughlin and others with high earning COLAs could potentially receive huge payouts.
City leaders voiced their disappointment about the decision and their concerns for the financial security of Providence. City Council President Sabina Matos released a statement expressing that “the outcome of today’s Rhode Island Supreme Court decision is at a minimum disappointing. At a time with so much fiscal uncertainty, this decision augments the need to be creative with our pension obligations while not sacrificing the City’s duty to pay debts and provide basic needs and services.” Providence Mayor Elorza also warned about the decision’s implications for the good of Providence and the sacrifices that the City now expects to make. He wrote: “Today’s Supreme Court decision will ensure that the unsustainably generous pensions that were doled out in the past will continue to be an albatross over our city for decades to come. This decision will force the city to make very difficult decisions about how to pay for ballooning pension payments at the risk of short-changing critical needs like public education, social services and infrastructure investments.” City officials urged other Providence leaders to think creatively in their suggestions for expanding revenue streams, given that the wellbeing of the City hangs in the balance.
The decision will immediately cost Providence several million dollars in payouts. In the future, public employees will be able to cite this case as a precedent to prohibit changes to their pensions and city leaders are now barred from unilaterally executing changes to the pensions of current and former city workers. Whereas the original reform saved millions, the City of Providence must now decide whether to declare bankruptcy as its only escape from mounting debt. City leaders certainly face pressure to devise a solution as quickly as possible.
Enacting larger reform to implement a more responsibly-managed retirement system will be essential to Providence’s recovery and the financial well-being of its public employees for decades to come.
This article originally appeared in Forbes on July 17, 2020.
An article in the Financial Times July 9 related how some asset managers are upset about a proposed U.S. Department of Labor rule that would bar pension funds from making investments that prioritize politics over sound retirements. The rule says that investing decisions can’t be driven by environmental, social and governance or “ESG” considerations if financial returns are sacrificed.
The proposal sounds eminently sensible, but, as the FT’s Billy Nauman writes, it “has set off alarm bells across the asset management industry, where ESG-themed funds have been a big success, attracting tens of billions of dollars of investment in recent years.”
Somehow, the potential marketing troubles of asset managers don’t bother me. I’m aware that their fees have squeezed by the popularity of straight-up index funds and that ESG investments, with higher expenses, have been a godsend. As an example, BlackRock BLK, the world’s largest asset manager, charges 46 cents annually for every $100 invested in its iShares Global Clean Energy ETF, one of the largest ESG funds in the world, and just 4 cents for its iShares fund linked to the Standard & Poor’s 500 index.
The Labor Department has a different concern, one that I have too as the leader of an organization that seeks to protect pensions. Our concern is that the people who are investing on behalf of millions of current and future retirees aren’t living up to their fiduciary responsibility by choosing stocks and bonds on the basis of ideological or social preferences.
Here’s the way the Department put it on June 30:
“To the extent that ESG investing sacrifices return to achieve non-pecuniary goals, it reduces participant and beneficiaries’ retirement investment returns, thereby compromising a central purpose of ERISA [the pension law]. Given the increase in ESG investing, the Department is concerned that, without rulemaking, ESG investing will present a growing threat to ERISA fiduciary standards and, ultimately, to investment returns for plan participants and beneficiaries.”
Let’s be clear. ESG is an essential tool for managing companies large and small. Boards of directors and managers who ignore ESG considerations risk, among other things, losing the war for talent and causing environmental harm at potentially great expense to their communities and their own bottom lines. Good governance is indeed good business.
The problem is that ESG has been hijacked by political activists who want to use other people’s money to advance their own political agendas. The definition of ESG is vague, at best. But consider the popular S&P 500 ESG index, which excludes about 200 companies that don’t meet certain ill-defined standards. Among those not deemed worthy are Walmart, Kimberly-Clark, US Bancorp, Clorox, Twitter, ViacomCBS, Nordstrom, Southwest Airlines, Johnson & Johnson, 3M, DuPont, Netflix, IBM, PayPal, and Berkshire Hathaway. Also excluded are weapons and aerospace makers like Lockheed Martin and Honeywell International. (Imagine if in 1941 investment managers were saying, “We’re not going to invest in companies that make bullets for our soldiers or engines for our B-17s.”)
Oh, and Standard & Poor’s also put its archrival Moody’s on the excluded list.
The catchphrase ESG has become merely an excuse for asset managers to apply their own prejudices (against defense contractors or energy producers, for example) to investment choices – and then disingenuously claim they are practicing some kind of sophisticated financial analysis. Individual investors are certainly entitled to pick stocks this way, but the Labor Department is right to enforce a different standard for fiduciaries who are responsible for secure retirements for millions of Americans.
It is time to reclaim ESG as a force for good, not an excuse to promote a political agenda. The Department of Labor is trying to accomplish that difficult task.
Washington, DC – IPFI advisory board members have submitted comment letters concerning a proposed regulation on environmental, social, and governance (ESG) investments by the Department of Labor. The letters express support for the revision to the Employee Retirement Income Security Act (ERISA) which would require ERISA-qualified asset managers to base investment decisions solely on financial considerations rather than any sort of alternative agenda. The question at hand is whether the plan managers, bound by fiduciary duty to their beneficiaries, are sacrificing investment returns or increasing risks to meet ESG goals unrelated to participant’s bottom-line financial interests.
In his letter, IPFI President Christopher Burnham writes, “[The Department of Labor has] made it clear that plans are forbidden to make nonpecuniary investments. Individuals are free to invest for their personal portfolios in companies that elevate social values. But fiduciaries have a different obligation, a ‘duty of loyalty’ to all of their beneficiaries. They cannot allow nonpecuniary preferences of any kind to influence investment decisions.”
Following up in an newly released op-ed in Forbes, Burnham notes that “our concern is that the people who are investing on behalf of millions of current and future retirees aren’t living up to their fiduciary responsibility by choosing stocks and bonds on the basis of ideological or social preferences…It is time to reclaim ESG as a force for good, not an excuse to promote a political agenda.”
Former Ohio State Treasurer and IPFI board member Ken Blackwell argues, “Pension fund managers need to be reminded that they are charged with acting on behalf of individuals who sacrificed a portion of their wages every payday with the expectation that their money would be handled with care, not used to promote the interests of political actors…The proposed rule change is an important step towards fulfilling these obligations.”
The Department of Labor should be applauded for taking this necessary step toward clarifying and correcting guidance on the fiduciary obligations of pension fund managers as far as ESG investing is concerned, and it is our hope that leaders in business, finance, and public policy will voice their support for this initiative. As Labor Secretary Scalia noted, this rule aims to “remind plan providers that it is unlawful to sacrifice returns, or accept additional risk, through investments intended to promote a social or political end.”
- BlackRock, the world’s largest private asset manager, has over the past two years begun to shift its investment strategy, placing a much greater emphasis on environmental, social, and governance (ESG) factors and boosting the presence of ESG funds in its portfolios. In a newly released issue brief, the Institute for Pension Fund Integrity delves into the steps that BlackRock and its founder Larry Fink have taken to arrive at this point, and examines the consequences that this shift will have on investments – particularly public pension funds. Read the full report here.
- “The SEC recently announced proposed rules aimed at addressing the outsized influence of proxy advisory firms, restoring much-needed protections to the proxy voting process and those who bear the financial consequences of the decisions made throughout. The proposed rules stand to correct a number of issues related to proxy advisory firms that compromise the shareholder voting process, company performance, and financial returns on public pension investments.” Read the full report here.
- “Our terrific public employees, who are counting on duty, stewardship, and the highest standard of care for the management of their retirement funds, deserve to be protected from individual political agendas, and the return to accountability, transparency, and politics-free management of our public pension funds. Our four state treasurer colleagues are wrong in their injection of politics into pension fund management, and the SEC is correct in their new proposed rules to correct the mistaken interpretation of their 2003 rule.” Read the full article here.
- “Denying loans to entire industries based on political pressure is an affront to the American taxpayers who have subsidized these institutions. It is especially egregious when it involves money loaned through the Paycheck Protection Program and other COVID-19 relief bills.” Read the full open letter here.
- “In a relatively short time, BlackRock has become the largest asset manager in the world. The firm built its impressive franchise as a low-fee, efficient provider of index portfolios. Now, however, Larry Fink, the mortgage-bond trader who founded the firm in 1988 and has been CEO ever since, wants to take BlackRock in a different direction. Why? And what does the shift mean for clients, especially pension funds?” Read the full article here.
- “BlackRock is a major shareholder in many corporations, and therefore has enormous influence in the voting decisions being made across the market. Due to the enormous amount of power BlackRock wields, investors are pressured to vote along the ideological lines drawn by the firm rather than what will maximize shareholder value in a time when the markets have plummeted in a way not seen since the Great Depression.” Read the full article here.
- “As all states face the toughest of times for their citizens since the great depression of the 1930s, is this really the time to violate fiduciary duty and play politics with bank assets and policies? Both Congress and the Executive Branch should take swift action to ensure that federal relief programs like the Paycheck Protection Program do not become pawns in a dangerous game of discrimination being played by some banks.” Read the full article here.
- “Across the country, nearly 3,000 public-pension plans provide retirement and disability benefits to over 350,000 career fire service and EMS employees. But chronic under-performance and unfunded liabilities in our public pension systems continue to intensify. Meanwhile, institutional investors have become increasingly reliant on proxy advisory firms to guide them on votes affecting company performance and returns on our pension investments.” Read the full article here.
- “We at IPFI applaud the Department of Labor’s efforts to clarify and correct guidance on the fiduciary obligations of pension fund managers as far as ESG investing is concerned, and we believe that ERISA must be modernized to ensure that fund’s investment strategies remain focused on fiduciary duty and the best risk adjusted return.” Read the full statement here.
- “When undertaken in a responsible manner, proxy voting is considered to be a key aspect in the effectiveness of capital markets – the SEC itself has said as much in the past. However, this is not the case when the reach and influence of proxy advisory firms has extended far beyond their stated role as straightforward providers of data and analysis.” Read the full article here.
- “In 2006, alternative assets made up just 11% of state pension investments. By 2016, that number had shot up to 26% of pension fund allocations. These investments almost entirely came out of what had previously been allocated to traditional equity investments, with fixed income sources’ share of pension fund investments remaining largely unaltered.” Read the full article here.
- “Recently, lawmakers from both parties have increased their scrutiny of many Chinese companies listed on U.S. financial exchanges, noting that they have not been subject to the same level of oversight and regulation as companies from the U.S., or, for that matter, anywhere else in the world.” Read the full article here.
- “Money has always bought power in Washington—and BlackRock certainly has money—but turning to a company that has so publicly stated that their top priority is no longer delivering value to its clients during a time of crisis is cause for concern.” Read the full article here.
- “The ruling in Thole vs US Bank N.A. has serious implications for pensions. New uncertainty surrounding the financial situation of current retirees could influence their decisions about how to retire. Regarding defined benefit pension plans, like the ones Thole and Smith were receiving benefits from, this ruling seemingly allows for heavy losses that could potentially permanently damage the plan, or even push it into closure.” Read the full article here.
- “In May, the California Supreme Court heard a case with the potential to set a new precedent for pension reform across the country. The court’s decision will impact the pensions of over one million public employees and will either confirm or limit the government’s ability to adjust pension benefits after they are promised to public employees.” Read the full article here.
- “The Chief Investment Officer of the California Public Employee’s Retirement System, Ben Meng, is repositioning the fund’s investments in the wake of recent underperformance caused by COVID-19.” Read the full article here.
- Adherence to fiduciary responsibility
- Balanced economic, social and governance (ESG) factor investment
- Long term pension fund returns
- Data driven investment
This article originally appeared in Forbes on June 16, 2020.
Is it ever proper for banks to play politics with their financial assets? The answer is a resounding “No.” You would think that with almost one-third of the nation unemployed and businesses of all sizes suffering, banks – particularly Goldman Sachs, Citibank and Morgan Stanley – would stay true to their fiduciary responsibility. Recently, both firms announced that they would not finance any oil and gas exploration and development in the northernmost part of Alaska. That revelation drew the ire of Alaska Senator Dan Sullivan, whose state already has a remarkable record of extracting oil and protecting the environment of the area.
Concerns about banks going down this path was addressed on April 28th by nineteen members of the U.S. Senate in a letter to Treasury Secretary Steve Mnuchin, as well as the Federal Reserve Board and the head of the U.S. Small Business Administration. In their letter they explain that a “vocal but small minority has weaponized federally-backed banks against politically disfavored businesses” and that they “find it extremely disconcerting that, while the vast majority of SBA program lenders do not promote financial discrimination policies, many of the nation’s largest institutions currently do.”
This was preceded by legislation proposed by U.S. Senator Marco Rubio to fight back against political discrimination by mega banks backed by the U.S. Government. Rubio’s Financial Discrimination of Industrial Contractors (FDIC) Act would prevent banks with $50 billion in assets and larger from receiving taxpayer funded loan guarantees if they deny loans to legitimate American companies. As Senator Rubio explains, banks that discriminate “shouldn’t enjoy taxpayer-provided guarantees if they are undermining the public policy of the United States.”
These lawmakers have good reason to be concerned about the potential of banks withholding financing to make political statements. As federally chartered institutions, banks enjoy government guarantees and U.S. taxpayer support. They don’t operate in a free market, meaning it’s entirely inappropriate for them to discriminate against lawful businesses for political reasons. If banks want to take such political actions, they should forfeit their support and guarantees from American taxpayers.
The U.S. Congress has not outlawed oil and gas companies in the U.S., or for that matter, tobacco companies, gun manufacturers, car companies that build fossil fuel vehicles, private prison companies, or even companies that do business in the West Bank of Israel. In fact, Congress voted to open a portion of the Arctic National Wildlife Refuge to drilling in 2017. Thus, what big Wall Street investment banks are doing is taking US Government assistance in one hand and directly countermanding U.S. law with the other.
Unfortunately, these banks are not just manipulating lending – they are also targeting the Paycheck Protection Program meant to help all American businesses get back on their feet in the wake of the coronavirus crisis. As all states face the toughest of times for their citizens since the great depression of the 1930s, is this really the time to violate fiduciary duty and play politics with bank assets and policies? Both Congress and the Executive Branch should take swift action to ensure that federal relief programs like the Paycheck Protection Program do not become pawns in a dangerous game of discrimination being played by some banks.
The Chief Investment Officer of the California Public Employee’s Retirement System, Ben Meng, is repositioning the fund’s investments in the wake of recent underperformance caused by COVID-19. To meet its future obligations, Calpers must generate a 7% annual return. Yet an in-house study in 2019 found that its chances of meeting that target over 10 years are just 39%. To do this, Meng says that the fund has to take greater risk, such as increasing its allocation to buyout funds, adding private credit and, further departing from its past as a conservative holder of stocks and bonds and use leverage to enhance returns.
Additionally, Meng believes that raising the fund’s current 8% target allocation to private equity a little and building a small position in private credit over the next three years could help make up for the losses. At the same time, Calpers is redoubling an effort to cut costs by concentrating its business with fewer outside managers and exiting underperforming strategies. Even if everything works in the plan’s favor, Meng says CalPERS’s chances of hitting its 7% target return over a decade will still be less than 50-50
CalPERS is the largest public pension fund in the US, with 600,000 beneficiaries, and pays out around $22 billion in benefits annually. CalPERS has become a highly important investment entity because of the “CalPERS effect.” It is named after the positive influence CalPERS has on a stock, when it makes it onto it’s “Focus List.” Because of their large size and relevance in the investment community, CalPERS is well renowned. If the money isn’t made up in time, it would work to undermine the plan’s reputation and profitability.
The state would eventually need to make up the difference either by taxes on the public or requiring public employees to contribute more of their salaries. This could lead to a fierce fight about who would shoulder the burden. The public largely are opposed to tax increases, and public workers don’t want to give up more of their paychecks. A standoff seems very possible.
CalPERS’ size and influence makes them an important pillar of the investment community. Most things CalPERS does makes news, from specific investments to big changes in plans like this. Pensions in states across the country are in varying degrees of the same situation because of the COVID pandemic. This could be a potential model either about how to invest effectively or how not to invest to curb the COVID economic downturn.
This article originally appeared in the Chief-Leader on June 22, 2020.
In this time of economic turmoil, firefighters deserve stable pensions, not political gamesmanship.
The COVID-19 crisis has put an incredible strain on public pension funds. State and city governments will be under enormous budget pressure as leaders scramble and struggle to recover from the pandemic and bring our economy back to “normal.” Meanwhile, our dedicated public servants—firefighters, law enforcement, health-care workers, and others—continue to uphold their duty in the face of these overwhelming challenges.
Having served on the FDNY for 28 years, I’ve witnessed first-hand the hard work that my fellow firefighters have poured into our community. We each took an oath to serve, accepting the risks of the profession. As a part of our compensation, we were fortunate enough to have a pension guaranteeing a secure retirement. In many cases, this meant sacrificing pay during our working years.
Across the country, nearly 3,000 public-pension plans provide retirement and disability benefits to over 350,000 career fire service and EMS employees. But chronic under-performance and unfunded liabilities in our public pension systems continue to intensify. Meanwhile, institutional investors have become increasingly reliant on proxy advisory firms to guide them on votes affecting company performance and returns on our pension investments.
Given the sheer volume of proposals which investors must consider when voting, proxy advisory firms offer direction by informing and making recommendations on the resolutions. However, two firms, Institutional Shareholder Services (ISS) and Glass Lewis, control 97 percent of the proxy advisory market. With a duopoly, there is very little market choice for plans to choose from.
Pension funds are some of these firms’ customers, which means our retirement security is directly impacted by their advice. Too often, this advice seems aimed at solving society’s perceived political and social ills rather than increasing returns.
Private investors may choose to structure their portfolios around such considerations, as they are solely affected by the financial strategy they implement, but public pensioners are not granted the choice to enter or exit a fund’s investing strategy. Because of this, pension boards must make prudent investment decisions that meet one goal—maximizing returns.
While investment managers are supposed to adhere to their fiduciary responsibility, proxy advisory firms do not have the same obligation. Given their outsize impact, this disparity is very concerning. To combat some of the problems associated with proxy advisors, the SEC is currently reviewing reforms to the industry in order to boost transparency—clearly a move in the right direction.
When young firefighters assume the risks that are associated with the position, their first thought isn’t always their public pension. It’s the fiduciary’s responsibility to ensure that our public servants’ retirement is safe, so that they can focus on the immediate situations in front of them, not the ones at the end of their careers.
Richard Brower is the former Vice Chairman of the New York City Fire Department’s Pension Fund and an Advisory Board member of the Institute for Pension Fund Integrity. He is also the former president of the Uniformed Fire Officers Association.