STUMP » Articles » A Week of Bad Pension Ideas: Finally, Divestment » 14 November 2015, 07:41

Where Stu & MP spout off about everything.

A Week of Bad Pension Ideas: Finally, Divestment  


14 November 2015, 07:41

Sorry for the brief interruption. Our webhost upgraded the system, which of course meant everything broke.

Thanks to Stu for the fix!

Here are all our bad pension ideas:

And now the last for the overlong week: divestment from coal/fossil fuel.

I’ve written about this issue just a couple weeks ago:.


The danger of divestment is more to the funds which are divesting than the targeted sector. I have no idea if the fossil fuel sector is in structural decline. It may be, in the very long run. Say, a couple centuries. I don’t know. My forecasting of this sort of thing isn’t likely to be good, mainly because we’ve only had about a few centuries experience in this particular area.

But these pension funds have a duration on the order of a few decades (maybe…some are shorter).

The last link, from 2007, gives four reasons that divesting a whole group (in this case, companies that do business with Sudan, Iran, etc.) can be problematic. I think it unlikely any of these trustees will be sued for breach of fiduciary duty, especially when non-fiduciaries (i.e. the politicians) remove choice from them.

But the issue is that public pension funds are desperate for investment income. They’ve been scraping for it in private equity and hedge funds, as well as any growth sector they can. Calpers and others have lost a great deal of money on “green” investments, and this seemed like a good gig as long as the money keeps rolling in from taxpayers, plugging any holes.

But if that money isn’t forthcoming….

The reason I added this one is that somebody else pointed out the damage from divestment due to political pressure:

Well, action has just been taken, but it is one that only makes the problem worse: Senate Bill 185, signed by Gov. Jerry Brown, will require CalPERS and the California State Teachers’ Retirement System to nix investments worth between $100 million and $200 million for CalPERS and about $40 million for CalSTRS.

The investments at issue are stocks held by CalPERS and CalSTRS in thermal coal. At the end of fiscal year 2014, CalPERS reported managing assets worth about $322.3 billion and so being required to sell up to $200 million in coal stocks affects less than 1 percent of its investment portfolio.

But the two state pension funds now own few, if any, individual thermal coal equity shares; just as people do, the funds invest primarily in mutual funds. SB 185 thus will set in motion negotiations with private fund managers to prune coal stocks from their portfolios or, if that is not possible, to cash out and move the proceeds to socially responsible funds that do not invest in coal.

Either way, CalPERS and its members will suffer capital losses. Coal stocks have fallen dramatically over the past several years owing to anti-fossil-fuel public opinion; divesting now means that such investments will be sold at prices well below those that prevailed when the stocks were bought.

This is called “locking in one’s losses.”


If you hang onto a losing stock, then yeah, you can lose even more. Various fossil fuel stocks have been down lately, and I don’t think one can only chalk it up to political pressure. New capacity had been brought on line, and some economies, such as China, are not growing as fast as once they were. So the demand growth is less than the supply growth.

(I could be wrong about the above… I don’t have time to look into it for now.)

But fundamental analysis isn’t why the California legislature is forcing the pensions to dump their coal investments. And in any case, it’s highly inappropriate for legislators to be legislating every damn little jot and tittle in pension assets (privatize public pensions now!)

It sounds like previous divestment pushes have hurt the pensions:

One consultant pegs the capital loss associated with all past CalPERS divestments (in tobacco and firearm manufacturers as well as other politically incorrect investments in South Africa, Iran, Sudan and some emerging markets) at $4 billion to $8 billion, putting California’s indulgence of anti-coal sentiments in an entirely new light.

I haven’t been able to find that specific consultant analysis. Please email me at if you know what this author is referring to.


It’s bad enough when you have government throwing away taxpayer money on grants to favored projects like Solyndra, which are inevitably bankrupt.

But it’s doubly worse when you’re expected to make up the losses because they were made in a pension plan.

Here is what the investment guy at Calpers said in 2013:

A top official with California’s public employee pension system admitted this week that its holdings in green energy companies have lost hundreds of millions of dollars.

Joseph Dear, the chief investment officer of the California Public Employees’ Retirement System (CalPERS), called its green energy investments “a noble way to lose money.”

If it had been his personal money lost, then I wouldn’t care.

But it’s basically the taxpayers’ money he was playing games with, and they didn’t have much of a choice in the matter. Money was thrown away on boondoggles, and then the California taxpayer is expected to pony up more so Calpers can continue to play political games with public pension assets.

As I wrote last year:

I understand that many of the politically connected see these huge pots of money and can throw a lot of fees, etc., to their favored people and causes. This is the main reason why I changed my mind about privatizing Social Security or trying to invest the SocSec Trust Fund in securities (ignoring for a moment that the Trust Fund is entirely fictional).

Similarly, from last year, Calpers shot itself in the foot by divesting from gun manufacturers.

These decisions were made on a purely political basis. And they hurt the financial performance of the pension funds.

I’m sure all these political actors think that the taxpayers (or bondholders) will make the pensions whole. That they’ll be able to guilt the people (whose money they took and played with to feel good about themselves) into having pity on the poor pensioners.

Except it’s not getting much play in Detroit. (more on that tomorrow)

So I am telling you, public employee unions, your “friends” are some of the very people who are undermining your pension security, far more than the groups explicitly lobbying for pension reform. In general, the reform groups look to attack future accruals, not past benefits earned.

But the public pension investment shenanigans?

Those threaten benefits even currently being paid.

Ask Detroit retirees.

There may come a time when there are no taxpayers to pony up.


It should be interesting if the Supreme Court rules that public employees can’t be forced to pay union dues, even for organizing activities.

Perhaps if that were the case, the unions would bitch more about the political games being played with pension fund assets. Because the current public union leaders have common cause with the legislators to play this game, at which the members can get hurt.

But if they’re forced to align interest with members (in order to convince more to pay dues)…

Hmmm. Of course, it could just end up status quo, with the public union leader gravy train continuing… until all the services in California end up privatized.

Until then, I guess the politicians can play funny money.

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