Tobacco stocks may have turned unhealthy, most notably because Liggett Group, conceding that smoking is addictive, reportedly proposes to settle its part of lawsuits brought by states against tobacco companies. But the issue for pension funds is how they should react based on their fiduciary responsibilities.
Do pension funds sell because tobacco is unhealthy? Or do they sell because the performance of tobacco-related companies is unhealthy? Or do they buy because the stocks may represent a good value for future returns?
No one should put a moral burden on pension funds to drop tobacco. Pension funds should rely on the fundamental investment analysis that guides their portfolio decision-making in general to meet their objectives of getting the best returns by taking appropriate risks.
Pension funds shouldn't be forced into any moral, or medical, judgments about smoking.
Corporate and other pension funds under the Employee Retirement Income Security Act have a duty to optimize their investment performance.
Public pension funds, which don't follow federal regulations, should resist pressure to ban investing in tobacco stocks.
Investment decisions should be based on how stocks and bonds are expected to perform.
Tobacco may be unhealthy, but it is legal. People smoke of their own free will. Tobacco companies aren't forcing people to smoke. They may try to persuade people through advertising.
But then, do pension funds divest investments in concerns that provide services and supplies to tobacco companies? And in turn, do pension funds divest in the suppliers to these suppliers, and so on?
If tobacco is so bad, the government should ban it. But the federal government hasn't. Although some states have restricted smoking in some public venues, no one has sought to ban it outright or ban it indirectly by raising taxes to prohibitive levels to make it financially onerous to buy cigarettes or other tobacco products. On the contrary, states regard tobacco as a steady revenue producer through rising but affordable taxes.
Smokers and potential smokers have had information on the health hazards of smoking available to them over the last 30 years.
Yet, some people still continue to smoke, despite three decades of warnings posted on cigarette packages, broadcast in public-service announcements and written in news and feature stories.
People can exercise their self-control to resist smoking. Many do and many don't.
The United States is after all a free country. Pension funds that ban tobacco-related investments for moral or health reasons then must confront prohibiting investments in other products that many suggest are unhealthy.
Such a policy would lead to pension funds hiring nutritional consultants to add to the coterie of consultants they now employ to analyze investment decisions. Ultimately, investments would have to be subjected to moral or health scrutiny on almost every aspect of our lives. Gambling would likely be high on that list of inquiry. Alcohol could be on it, too.
But the odds are that all this kind of examination, regardless of the good intentions, would bring the ruin of pension funds and of retirement income for millions of workers. The system would go up in smoke.