Pension funds should stop trying to save the world and reaffirm their focus on securing retirement benefits for millions of participants.
Pension fund fiduciaries, especially those of public plans, increasingly have embraced ESG — environmental, social and governance — goals in overseeing the investment of their assets. One of the latest to step up such an effort is Deborah B. Goldberg, Massachusetts treasurer and a member the Massachusetts Pension Reserves Investment Management Board, Boston, which oversees the $61 billion Massachusetts Pension Reserves Investment Trust Fund. She proposed the fund expand its proxy-voting guidelines to include supporting, among other things, a stop to all misleading advertising to youth, increased health warnings about cigarettes and adoption of corporate recycling policies. Ms. Goldberg also proposed linking executive pay to non-financial factors, including performance related to social and environmental goals, customer and employee satisfaction, corporate downsizing, community involvement, human rights and predatory lending.
In addition, she introduced “a new statement of principle in which PRIM urges companies to lead on the issue of wage equality and proactively seek to hire a diverse workforce,” according to a statement from her that included the other proposals.
“Large institutional investors such as PRIM have the ability to influence corporate governance and policy through the proxy voting process, and PRIM has traditionally exercised that influence based on guidelines established by the PRIM Board,” Michael G. Trotsky, executive director and chief investment officer of PRIM, said in a statement about the goals.
The impulse to use the clout of that pool of assets to expand the mission of the pension fund is understandable. However, fiduciaries must not act on impulse but rather with a discipline to analyze the impact of the outcome on pension fund valuation.
Ms. Goldberg and other officials advancing social goals should demonstrate how those goals would enhance the pension fund's return and risk objectives. They must present data showing the enhancement and benchmark the performance of their non-financial objectives. In addition, they need to put a timeframe on realizing a better performance of their assets from pursuing social objectives as well as a cost-benefit analysis of that pursuit against the enhancement of pension fund return.
Pension funds have long time horizons. Some say the horizon is perpetual for public funds. But the sun on that horizon can set quickly when investment returns fail to earn enough to pay benefit promises, as has happened to many corporate plans and a number of public systems.
The objective of a pension fund is to enhance its valuation, not the reputation or even the long-term valuation of any one company.
Fiduciaries shouldn't ignore sustainability factors. But they need to evaluate how they add to the valuation of pension assets.
The sole duty of pension plan fiduciaries, whether at MassPRIM or any other retirement plan, is to act in the interest of participants, strengthening their retirement security.
Fiduciaries need to analyze any investment-related decision in a risk-and-return framework.
Fiduciaries must exercise the clout to influence corporations, but to use their huge pools of assets with care, keeping the focus on their responsibilities to participants, not their ideals for better-directed corporate advertising or a cleaner world.
Those are worthy pursuits. But they are not the mission of the pension fund.
These external objectives can become a distraction.
MassPRIM's assets cover only 61.2% of the pension fund's liabilities, leaving $29 billion unfunded, according to the trust fund's 2014 annual report.
That deficiency is a big part of the mission that is unfulfilled, leaving participants less secure in their pensions.
That deficit should keep fiduciaries' focus on their mission.
Fiduciaries considering adding social goals to their mission need to be disciplined. They must demand empirical evidence and data, showing how these objectives can improve pension fund asset valuation. Before approving new missions, a board needs to examine the data on, say, the linkage of executive pay with social goals, to comprehend the metrics of measurement and the impact to the valuation of the pension fund assets.
Fiduciaries seeking such social goals must analyze the extent to which their external investment managers pursue such objectives. Managers that have discretion can make their own decisions. But if the goals are so important to a pension fund, then fund executives must decide whether to constrain the discretionary managers by adding social objectives to their investment portfolios.
On the issue of compensation, some fiduciaries are adding concern about the wage makeup of a company's entire workforce.
On tobacco usage, public pension fund fiduciaries could carry that same logic to eschew the tax and other revenue from tobacco sales that contribute to payments to the pension plan.
To add ESG to fundamental metrics in valuing companies, pension funds must seek an analysis on how these new factors have enhanced performance.
A report released March 24 by Mercer and LGT Capital Partners found 57% of asset owners and other institutional investors surveyed believe incorporating ESG into alternative investments decision-making has a positive impact on risk-adjusted returns. Only 9% believe incorporating environmental, social and governance risk factors lowers returns, while 34% believe it has no effect.
Fiduciaries should ask for details on measurement of alternative investment performance from those ESG factors. What are the performance numbers?
In a 2012 paper published by the Rotman International Journal of Pension Management, Jack Gray, adjunct professor at the Paul Woolley Centre for Capital Market Dysfunctionality, University of Technology, Sydney, noted consequences of favoring ESG metrics. Among them, “ESG investors risk overpaying for the "privilege' of owning” well-governed companies, investing in them “almost regardless of price,” he wrote.
The work of fiduciaries to secure retirement income through their oversight of the investment of assets is an underappreciated objective and often unmet challenge. Fulfilling the security of pension benefits serves an important purpose to the society and economy. Fulfilling that mission leaves the society and economy with resources that might otherwise have gone to support retirees for use for other priorities.
Fiduciaries should never lose sight of their high calling on behalf of participants.