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New Pensions Group Says Forget About Climate Change

The Institute for Pension Fund Integrity, founded by a former state treasurer, is calling on pension fiduciaries to prioritize investment returns over political issues like divestment.

Pension funds should focus solely on getting the best investment returns and ignore issues such as climate change and other political issues, says a new group founded by a former Connecticut state treasurer.

In a white paper released today, the new group, the Institute for Pension Fund Integrity, argued that prioritizing anything but returns is a breach of fiduciary duty. Christopher Burnham, the institute's founder and president and a former United Nations undersecretary, told Institutional Investor that politics have “no role to play” in managing retirement funds.

“We take a market or realistic approach to unfunded liabilities in state and municipal pension systems,” he said.

Burnham, who is also the founder of venture firm Cambridge Global Capital and previously served six years as a vice-chairman at Deutsche Asset Management, said that when he was Connecticut's treasurer and sole fiduciary of the state's retirement system, activists wanted the pension fund out of stocks such as tobacco.

“Now it's divesting out of energy stocks,” he said.

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The new Institute for Pension Fund Integrity launches as U.S. institutional investors, including pension funds, are increasingly incorporating environmental, social, and governance factors into their manager selection and portfolio construction process. U.S. institutions have been slower to adopt such principles than their counterparts in Europe, who broadly view ESG factors as a critical component in building portfolios. 

The institute aims to do research on the extent of the underfunding of pensions nationwide and will call for increased transparency on the health of state plans, including reporting underlying assumptions such as expected rates of return. The group also plans to add a calculator to its website that will allow users to see how different return rates will affect the total amount of money a pension plan will need to fulfill its promises to retirees. “States are dramatically under-reporting this,” Burnham said. 

As for divestment from certain sectors, Burnham said fund trustees have a fiduciary responsibility to focus on how it would impact the portfolio, because courts have ruled that they have to manage the money to the best of their ability. “When you take on a political agenda, you're violating those rulings,” he said. “Eliminating companies that sell to the military, companies that deal with alcohol and firearms – it’s not a slippery slope. It's a cliff.” 

Fossil fuel divestment, for instance, could be harmful because some of the best performing stocks are in the energy sector, according to the white paper. The group cited a 2018 Kiplinger’s report that named six major energy companies among its top 18 retirement investments.

Broadly speaking, U.S. pension funds are not in a position to sacrifice potential returns. None of the 300 state plans or almost 6,000 local plans in the U.S. are fully funded once conservative actuarial assumptions are used to analyze the plans, according to the group’s white paper. Under current actuarial assumptions, 30 percent are adequately funded. With more realistic expectations about longevity, no plans are more than 63 percent funded. Burnham said the first thing to address is having accurate actuarial information.

“There are 70,000 Americans over the age of 100 right now,” he said. “In 30 years, there will be 1 million over 100.”

The group is particularly outraged by the poor health of pensions in Connecticut, Illinois, and New York. Efforts by these plans to incorporate goals other than maximizing returns and diversifying portfolios have made the problems worse, it said. In part, that’s because elected officials are only temporarily in office, and each administration's causes can change a pension’s strategy.

“The primary responsibility of any public pension plan manager is to manage the investment in a way that guarantees the best return possible for beneficiaries,” the paper concluded. “Even though many are managed by politically appointed or elected managers, those individuals must be able to separate politics from the money.”

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