Study: Public Pensions Wrong Place for Divestment

Author Alicia H. Munnell, of the Center for Retirement Research at Boston College, argues in ” Should Public Plans Engage in Social Investing ?” that pension programs are ill suited as tools to bring about social change in other countries (See Cover: Doing the Right Thing? ).

“Even assuming that divestment is an effective mechanism to stop genocide and reduce terror risk and that state legislatures and pension fund boards are the right place to make foreign policy, the issue remains whether pension funds are an appropriate vehicle for implementing that policy,” Munnell wrote. “The answer seems unquestionably ‘no’. “

One big reason: Divestment policies may well put plan sponsors at odds with the notion that a primary function is to generate the highest returns for their participants (See Public Pension Fund Divestment: A Fiduciary Risk? ).” In many instances, the environment sur­rounding public pension fund investing is politically charged and encouraging public pension fund trust­ees to take ‘their eyes off the prize’ of the maximum return for any given level of risk is asking for trouble,” Munnell claimed.

Plus, she pointed out, any plan losses will have to be made up not by those making the political decisions now but future generations of taxpayers.

In the paper, Munnell also asserted:

• the academic literature suggests that social investing screens are likely to have very little impact on the target company and that the impact on the pension fund depends on the scale of the screen. “Overall, the results show that the differences in risk-adjusted returns be­tween the screened port­folios and unscreened portfolios are negligible and in most cases zero,” Munnell wrote.
• Requirements from the Employee Retirement Income Security Act (ERISA) that plan sponsors owe participants a duty to act with prudence and loyalty to participants’ interests have kept the social investing issue out of the private pension realm. ” Thus, ERISA fiduciary law has effectively constrained social investing in private sector defined benefit plans. Social investing is a public pension fund phenomenon,” she wrote.
• Forcing state plans into divestment postures may run afoul of legal rulings that have held divestment policies unconstitutional for infringing on the federal government’s right to conduct foreign policy (See Court Blocks Illinois Sudan Law ).
• Using a pension plan as a political tool “is a slippery slope” that may eventually grow in scope to the point where it can severely impact performance.“At some point, the administrative costs of broad-based divestiture will balloon and excluding large numbers of companies will definitely hurt returns,” she contended.

The study is here .