WASHINGTON - A House debate on economically targeted investments last month was nothing if not far-reaching.
To bolster their arguments for or against the Pension Protection Act, members dragged in such disparate issues as a possible $44,000 per participant loss from ETIs over 30 years, international investments and the cost of spare parts for the B-2 bomber.
The House approved the measure 239-179; it bans the Labor Department from giving out information or spending money on a clearinghouse for ETIs and voids a 1994 interpretive bulletin on the investment.
But at times it was hard to figure out what the members were talking about.
Jim Kaitz, vice president of government relations for the Financial Executives Institute, Washington, isn't sure the debate had any substance. There was "all kinds of hyperbole," he said.
One example: a report by the Joint Economic Committee, claiming pension funds would lose nearly $44,000 per participant over a 30-year period if they invested 5% of their assets in economically targeted investments. The report said ETIs could underperform other investments by 200 basis points, attributing the underperformance to a 1983 study on social investments by Alicia Munnell, former vice president of the Federal Reserve Bank of Boston. But social investments presume the investor is willing to sacrifice return to do good. ETIs are supposed to earn a risk-adjusted market rate of return.
The JEC report also cited a second study by Wayne Marr of Clemson University, Clemson, S.C., and John Nofsinger of Washington State University, Pullman, Wash., which said ETIs lower returns by 118 to 210 basis points.
Plugging in the 118- and 210-basis-point loss, the JEC estimated that in 10 years, pension funds would lose $55 billion to $94 billion; in 30 years, pension funds could lose $1.5 trillion to $2.3 trillion. Using a median 200-basis-point loss, pension funds could see a $43,298 loss per person over a 30-year term, if the fund invested 5% of its assets in ETIs.
The JEC used a 12.1% average rate of return, based on the Employee Benefits Research Institute's 1990 to 1995 average rate of return on private pension assets.
Sylvester Schieber, director of research at Watson Wyatt Worldwide, Washington, said the study should have used a real rate of return that would have allowed for inflation, instead of using a short-term historical rate.
Paul Kaplan, vice president and chief economist at Ibbotson Associates Inc., Chicago, said to get an accurate long-term expected rate of return, it's better to compare total returns on stocks to long-term bond yields over a long historical period.
"If this (rate) is right, it's only by coincidence," Mr. Kaplan said.
Assistant Secretary of Labor Olena Berg said even if the numbers were correct, pension fund managers would be violating pension law if they continued, over a 30-year term, to make an investment that consistently returned less than other investments.
But this wasn't the only political football thrown around during the House debate.
Rep. Robert Andrews, D-N.J., said instead of debating the ETI issue, members should be debating legislation "that would address the underfunding of the Private (sic) Benefit Guaranty Corp. that put the pensions of many Americans at risk."
(Last year, Congress passed the Retirement Protection Act, which includes a change in the premium schedule underfunded pension plans pay to the PBGC. The agency's aggregate deficit dropped 60% in 1994 to $1 billion.)
And for nearly two hours, the House debated an amendment that didn't pass, offered by Rep. Gene Greene, D-Texas, that said nothing should prevent institutional investors from making domestic investments.
"Pension funds that have invested in local economic growth and in our communities will begin investing overseas," said Rep. Lynn Woolsey, D-Calif. "Because H.R. 1594 prohibits the Department of Labor from providing information on ETIs .*.* .it will be safer for pension funds to invest overseas, where there will be absolutely no confusion about the legality of the investment."
Rep. Luis Gutierrez, D-Ill., compared a House vote to provide $500 million for B-2 bomber spare parts to public housing projects.
"If you voted to continue the B-2, and you are planning to vote to cancel ETIs, please realize that the economic benefits of the B-2 are the same kind of collateral effects that you think (are) so terrible when it occurs in the form of public housing or public infrastructure," Mr. Gutierrez said.