Economic engagement with China has become an increasingly hot topic around the nation and public pension officials from Florida to North Dakota are being pressured to pull investments away from Chinese firms. As the pressure to use public pension funds to enact social and/or political change abroad grows, policymakers should know that pension divestiture is unlikely to achieve the desired political goals. Similarly, politically motivated investment divestitures may be incompatible with the fiduciary role of plan managers.
Public pension fund managers are not tasked with conducting U.S foreign policy. As the stewards of our nation’s public retirement systems, plan managers have an ethical obligation as fiduciaries to make prudent, risk-appropriate investment decisions. This undoubtedly requires analysis of all types of risk, including those that are geopolitical. However, they should avoid using the influence granted to them by their funders—public workers and taxpayers—to exacerbate geopolitical risk. Plan managers should defer the politics of foreign policy to the U.S. Congress and White House
Divestiture politics predate the current moment, and past movements have successfully altered the behaviors of pension funds. Nevertheless, shaping pension investment policy based on political activism is likely to become increasingly problematic. Activists that target pension fund investment policies represent a host of ideologies. Fund managers risk making themselves referees on some of society’s most contentious issues as they seek to placate a growing list of contradicting interests.
Not only do divesture policies based on political interests extend beyond the role of public pension fund managers, but they are also very unlikely to accomplish the intended outcome. There is little evidence that divestment movements influence the desired target to encourage policy changes. In the 1980s, students across the U.S. protested the apartheid system in South Africa, demanding their universities divest from companies operating in the country. Despite about 150 educational institutions heeding the plea, researchers found that divestment had no effect on the market value or behavior of South African companies. Given the massive size and economic influence of China, divestment movements targeting China would likely have a similar effect or lack thereof.
The long-term viability of a pension system is contingent on the ability of fund managers to strike a balance between achieving sufficient investment returns to have the necessary funding to provide promised benefits and managing risk through diversified investments. The loss of diversification associated with refusing to invest in the world’s second-largest economy will increase the risk facing these funds, and it will likely hamper the efforts to recoup investment losses from the COVID-19 market shock. Divestment policies can be a significant disservice to the public workers that are depending on their benefits to be there when they retire.
The motivation of plan administrators should be exclusively centered on maximizing investment returns and managing the security of the fund through risk-reduction policies – otherwise they will be undermining their fiduciary responsibility to their members. There should be no exceptions for industries some find objectionable (e.g., firearms, tobacco, pipelines, petroleum, etc.), nor are there exceptions for nations.
Although blanketed divestitures policies should warrant hesitation, plans to improve general transparency for foreign securities trading in the United States are a step in the right direction. All foreign financial instruments sold to Americans should be held to the same regulatory standards as their American peers.
With over $1.2 trillion in national public pension debt, the continued challenges governments face during the COVID-19 pandemic, and inadequate retirement security plaguing state and local governments, the nations’ public pension managers need to be focused on advancing prudent pension policy. Pension managers should protect the interests of plan dependents and reject political meddling.
A version of this column previously appeared in Townhall Finance.