Can pension funds use their enormous financial resources to leverage a better return for stakeholders — workers, communities, main street merchants?

They are in Canada. And it’s time U.S. state governments and pension managers start thinking about ways to flex this muscle.

Between corporations sinking money into public policy campaigns that undermine workers’ rights and business practices that work to destabilize middle class institutions, America must have a serious talk about Wall Street’s “fiduciary responsibilities” to the rest of us.

Is it a “fiduciary responsibility” for managers of teachers’ retirement funds to invest in companies that contribute to public policies to defund public education?

Is it in the interest of retired public employees and future retirees if state investment boards seek only short-term returns on investment in companies and ignore how profits from those securities are being used to undermine public service careers, seniority systems, healthcare and other quality of life issues for stakeholders and shareholders enrolled in the plans?

Two recent reports highlight the complexities among investors, companies, and community stakeholders, known as stakeholder-shareholder conflicts.

Minnesota 2020’s June report, “Money Talks,” examined this issue and what Minnesota might do to overcome these problems. In April, a New York-based think-tank, Remapping Debate, examined how pension funds could use their enormous power to shape more sustainable investing practices. Report author Mike Alberti, analyzed California’s teachers and public employees’ funds and Canadian pension funds to answer: “What if pension funds grabbed the reins?”

The goal many of these group investors have is to help corporate managers and boards recognize the value of investing in ESG (environmental, social and governance) issues.

‘Misalignment of interests’

Among the big issues Alberti identifies is that public pension funds are often run by inexperienced appointees that hire outside firms with huge fees. These outside managers don’t always make the best long-term decisions and cost funds precious resources. This is due to a “misalignment of interests” among fund managers, beneficiaries and the private firms that manage the money, a classic example of the “agency theory” problems discussed in the Money Talks report.

The answer, if we follow Canada’s example, is for states to directly hire experienced money managers. However, attracting seasoned finance professionals would cost state governments far more than the public might be willing to pay a public servant. Ironically, many private fund managers that states already use cost well more in fees than in-house fund managers.

Also complicating a U.S. experiment using the successful Canadian fund models is that fiduciary responsibilities are interpreted in a variety of ways in the United States. At a basic level, they involve trust, honesty and require the trustee to act (invest) in the beneficiaries’ best interests. Public pension funds are often managed the most conventionally, not always the smartest, according to critics of the current system.

Economies of scale

But economies of scale come into play. Minnesota is a big business state, but it is a middle-of-the-pack to small state in population. That raises questions about how much of a securities research operation the state should employ, and would explain why Minnesota public pension plans use outside management firms.

The Minnesota State Board of Investment manages more than $57.5 billion in pension funds for the Minnesota Teachers Retirement Fund, the Minnesota Public Employees Retirement Fund and the Minnesota State Employees Retirement Fund.
Organized labor, senior citizen funds and other beneficiaries of investment plans also have direct shareholder-stakeholder interests in how their capital ends up being funneled off to policy uses counter to their interests.

The National Institute on Retirement Security (NIRS) in Washington recently completed economic impact statements for the various states on expenditures made by state and local government retirees. In Minnesota, 165,994 residents received $3.4 billion in pension benefits in 2009, the last year for which data are available. This averaged $1,719 per month, or $20,633 per year.

This translates into retiree expenditures supporting 41,337 jobs in Minnesota and total state income for state residents of $1.9 billion. When multipliers are factored in, pension funds from Minnesota and other states paid to state residents supported $5.7 billion in total economic activity.

‘Money goes right back into the economy’

In issuing the report, NIRS economist Ilana Boivie said “Minnesota retirees don’t put their pension checks in a drawer and forget about them. They use it for daily living expenses, and to pay taxes. The money goes right back into the economy, which means financial stability for the retiree and economic growth for Minnesota.”

States like Minnesota and its neighbors might not want to take over direct management and placement of pension funds. But beneficiary groups of public and private funds should collaborate to share information, demand corporations reveal where they put campaign funds, and offer guidance to companies on what are legitimate stakeholder and shareholder interests.

The biggest hold back in the national economic recovery has been the loss of public sector jobs from the federal, state and local levels from self-defeating budget cuts. Retirees should not have their pension funds used to do even more harm to their best interests.

Lee Egerstrom is an Economic Development Fellow at Minnesota 2020, a nonpartisan, progressive think tank based in St. Paul. This article originally appeared on its website.

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