Compliance February 6, 2023

Partisan Divide Continues to Sharpen on ESG Investing

EBSA head Lisa Gomez spoke in defense of a DOL rule that would permit ESG in retirement plans as Republicans push back against ESG in Congress and the courts.

Reported by

The Department of Labor’s assistant secretary of labor for employee benefits security, Lisa Gomez, defended the DOL’s final rule allowing the consideration of ESG factors in retirement plan investments at a webinar hosted Monday by Ceres, a sustainability advocate.

The rule, which took effect on January 30, permits, but does not require, the use of ESG considerations in investment selection by retirement plan fiduciaries. There is a pending lawsuit in Texas challenging the legality of the rule.

Never miss a story — sign up for PLANSPONSOR newsletters to keep up on the latest retirement plan benefits news.

Gomez explained that this rule is “not a per se requirement” to use ESG and clarifies that ESG factors may be considered as part of a fiduciary’s ordinary risk-return analysis. She also explained that this new rule does not allow fiduciaries to sacrifice the financial health of a plan to pursue other goals: A fiduciary may consider the risks and opportunities of climate change and other ESG factors.

Gomez dubbed the rule “a return to neutrality.”

According to Gomez, the previous rule, passed during the administration of President Donald Trump, which required only “pecuniary factors” to be used in investment selection, had a “chilling effect” on the consideration of ESG factors. Gomez said the word “pecuniary” neither appears in the text of the Employee Retirement Income Security Act, the governing statute for both rules, nor does it occupy a “long-standing place in employee benefits law.”

Gomez briefly discussed one of the more nebulous provisions of the new rule when she said participant preferences for investments can be considered in menu selection on the grounds that it can increase plan participation and deferral rates, thereby increasing retirement security. She did not comment on how fiduciaries should determine adequate participant interest or how much economic gain could be compromised in exchange for increased participation, if any.

Eric Pitt, a climate finance consultant at Ceres who moderated the webinar, asked Gomez how a fiduciary should consider a hypothetical ESG large-cap stock fund for a plan menu: Should the fiduciary compare it to other similar ESG funds or the entire universe of large-cap funds? Gomez answered that there is no special treatment for ESG funds, and a fiduciary should look generally at the risk and return for any and all large-cap equity funds available, whether they use ESG considerations or not.

Despite the branding of the rule as neutral, Republicans in Congress have increased their organized opposition to the use of ESG considerations in retirement-plan investing.

Congressman Patrick McHenry, R-North Carolina, chairman of the House Financial Services Committee, announced the creation of a “Republican ESG working group” on Friday. The purpose of the working group is to “combat the threat to our capital markets posed by those on the far-left pushing environmental, social, and governance (ESG) proposals.”

The working group will be chaired by Congressman Bill Huizenga, R-Michigan, and is staffed entirely by Republicans.

Last month, Congressmen Juan Vargas, D-California, and Sean Casten, D-Illinois, started the Sustainable Investment Caucus.

Casten said in a statement that, “Given the significant growth of assets under management in funds that prioritize ESG factors, Congress has a duty to craft policies that provide investor protections and transparency of information to market participants.”

Members of the Sustainable Investment Caucus are all from the Democratic Party.

Data and Research February 6, 2023

Public Pension Return Assumptions Fall in 2022, NCPERS Says

Overall funded status rose 3 percentage points to 77.8% on private equity, real estate returns.

Reported by

The average assumed rate of return for public pension funds dropped in 2022 to 6.86% from 7.07% a year earlier, according to a report from the National Conference on Public Employee Retirement Systems.

The drop came as capital markets overall struggled last year, while public pension funds managed to increase their funded status, the study found.

The funded ratio at public pension funds increased to 77.8% last year, compared with 74.7% in 2021, per a survey of almost 200 funds conducted by NCPERS, the largest trade association for public funds in the U.S. and Canada, in partnership with Cobalt Community Research.

For more stories like this, sign up for the PLANSPONSOR NEWSDash daily newsletter.

The vast majority of survey respondents, 92%, represent defined benefit plans, 8% defined contribution plans, 10% combination plans and 5% cash balance plans. The total exceeds 100% because of multiple responses, according to NCPERS.

Public pension programs scored an average one-year return of around 11.4%. By contrast, the S&P 500 was down around 19% and the Bloomberg US Agg, which tracks bonds, was off 13% in 2022. Heavy concentration in real estate and private equity were the key to the funds’ outperformance, the report says.

The study’s findings highlight public pensions’ “resiliency in the face of volatile markets, rising interest rates, and disruption in the workforce during the COVID-19 pandemic,” said Hank Kim, NCPERS executive director and general counsel, in a statement. “It’s clear that public pensions remain dedicated to maximizing returns while managing risks in order to efficiently deliver retirement benefits to public servants all over the country.”

Higher contribution income helped. Investment returns were the largest component of the gains, accounting for slightly more than two-thirds of them, but the stronger average member and employer contributions also played a role. Each rose by one percentage point, to 9% and 24%, respectively.

Benefit payouts were larger than 2021, but not enormously so. The aggregated average cost-of-living adjustments to members last year was 2.0%, which was slightly above the 1.7% COLA offered the year before.

The funds’ confidence in the future remains healthy. Respondents were asked, “How satisfied are you with your readiness to address retirement trends and issues over the next two years?” The average rating was 7.8 on a 10-point scale, down only a small amount from the prior survey.

One other takeaway is that environment, social and governance factors matter to those managing public pension funds: Some 54% indicated that ESG is somewhat or very important in their investment decisions.

A total of 195 public retirement funds participated in NCPERS 2023 Public Retirement Systems Study. Of these survey respondents, 108 also participated in the previous year’s study. The responding funds represent more than 19.6 million active and retired members and assets exceeding $3 trillion. About 56% are local funds while 44% are statewide funds, NCPERS reported.

«