STUMP » Articles » Priorities for Pension Funds: Climate Change or Solvency? » 28 May 2017, 14:00

Where Stu & MP spout off about everything.

Priorities for Pension Funds: Climate Change or Solvency?  


28 May 2017, 14:00

It doesn’t have to be exclusive, to be sure.


When I saw this:

This is just idiotic. This is far from CalPERS’s biggest threat. At least within the next couple decades, unless you want to count earthquakes as part of climate, and that’s just…

How climate change triggers earthquakes, tsunamis and volcanoes

Yeah. Sure. Whatever.


But before I get into the latest dereliction of fiduciary duty, let’s check out those who link to me!

Howdy to everybody coming from the Actuarial Outpost (where I’m linking myself), Facebook (not sure where these links are being shared… I generally don’t do it except for non-political stuff), and students trying to figure out how crazy I am before registering for my classes. (Don’t worry… this blog ain’t the stuff you’ll be seeing… except the mortality table stuff. DEAAAAATH)

My logs aren’t telling me how the googlers are getting here, but I hope you found what you were looking for.

And howdy to those who came via my twitter feed.

If you want to contact me, emailing is the best way. I’m on twitter once a day, at best.


Same as it ever was, but as a reminder, here are prior posts of divestment campaigns for public pension funds – in reverse chronological order.

What I’m about to write about is not new. But people really should have learned about what a bad idea this is, by now.

Of course, the same “we couldn’t see it coming!” public pension disasters keep coming, so….


Let me link to a bunch of stuff, then comment on what’s going on. These are in no particular order — just after my last divestment post in March.

A couple comments – most of these are focusing on California. There’s a good reason for that: Calpers is the largest pension fund in the country. If you can get it to follow your stupid investment idea, perhaps smaller funds will follow.

Second, the issue with Norway. I am a little suspicious about the supposed Social Justice Warrior motivation for divesting from the pipeline.

Why? Because the Norwegian economy has been very dependent on oil wealth. A recent piece where Norwegian prime minister points out that they can’t keep depending on oil wealth.

If you heard that Saudi Arabian pensions were divesting from the Dakota pipeline, you’d probably think “conflict of interest”, not “protecting the environment”.

But people in the U.S. hear Norway, and they think IKEA, Nokia, and Bluetooth… though none of those are Norwegian. The largest companies in Norway are generally related to oil, or to the Norwegian government.

But don’t worry, Norway. You’ve always got your fjords. Until climate change (that originally made the fjords) obliterates them.

And finally, to that last one, about the eeeevil Monsanto and Calpers’ investment in said company.

Monsanto’s market capitalization: $51 billion as of 26 May 2017

Calpers investments in toto: Over $300 billion

Calpers’s “fortune” in Monsanto: $136 million.

So, I could be a total dick and do the usual math prof thing:

But here’s the math:

Calpers’s investment in Monsanto as percentage of Monsanto market cap: 0.3%

Calpers’s investment in Monsanto as percentage of Calpers’s assets: 0.05%

If you don’t understand how small those percentages are, I recommend checking in with Khan Academy. Start here.

Here is the bottomline:


So let’s do a quick refresher. Pension funds have fiduciaries who are in charge of these types of decisions.

Definition of fiduciary duty from a legal source:

A fiduciary duty is the highest standard of care. The person who has a fiduciary duty is called the fiduciary, and the person to whom he owes the duty, is typically referred to as the principal or the beneficiary. If an individual breaches the fiduciary duties, he or she would need to account for the ill-gotten profit. His or her beneficiaries are entitled to damages, even if they suffered no harm.

Fiduciary duties exist to encourage specialization and induce people to enter into a fiduciary relationship. By imposing these duties, the law reduces the risk of abuse of a beneficiary by the fiduciary. As a result, potential beneficiaries can have greater confidence in seeking out a fiduciary.

So, the usual argument is about fiduciaries grabbing money for their own use. That was the old-time problem with those handling funds for other people.

But we’ve come across other, not-directly-for-profit, actions that destroy the value of assets that the fiduciary is supposed to protect, in this case for political reasons.

The IRS notes on fiduciary duty for retirement plans:

Fiduciaries are in a position of trust with respect to the participants and beneficiaries in the plan. A fiduciary’s responsibilities include:

- acting solely in the interest of the participants and their beneficiaries;
- acting for the exclusive purpose of providing benefits to workers participating in the plan and their beneficiaries, and defraying reasonable expenses of the plan;
- carrying out duties with the care, skill, prudence and diligence of a prudent person familiar with the matters;
- following the plan documents; and
- diversifying plan investments.

The responsibility to be prudent covers a wide range of functions needed to operate a plan. Since you must carry out these functions in the same manner as a prudent person, it may be in your best interest to consult experts in such fields as investments and accounting.

Note that the top two are key. Not “making a political statement”, not “starting a first-of-its-kind GREEN investment fund”.

The people with true fiduciary duty – that is, Calpers trustees in general, are not going along with this. But not every place has the concept of fiduciary duty, it seems. And POLITICIANS ARE NOT THE FIDUCIARIES.

That the California legislature votes for this, that, and the other stupid investment policy … they’re not the ones who directly suffer. The theory has been that taxpayers will soak up whatever idiotic investment policy is imposed on Calpers, and that theory is being tried directly.

Even if they’re not able to directly hit taxpayers to make up for investment shortfalls, there will be hits on taxpayers in terms of reduced services, higher borrowing costs, etc. And then the taxpayers will become ex-taxpayers as they move to more tax-friendly climes.

I understand politicians are usually not very smart people, otherwise they’d be the people buying the politicians, but perhaps they would want to think about this. Especially if they want to make a career of being a politician. Talk about unsustainable if the fun money goes away.


The truth is that for many of these funds, divesting from any particular industrial sector will not have a huge effect.

Let’s say you divest from oil and other fossil fuels.

Okay, but there are other companies that do well because the energy sector is doing well. Obviously, the companies providing equipment and other support for the oil, etc., companies. And then there’s all the people who work for these companies — they buy stuff. So third-hand you get boosts to retail operations like Walmart and car companies, etc.

Essentially, in a global economy, something so central as energy is going to be connected to how well others are doing. (If you want to go to finance theory, this relates to beta, aka market correlation.)

So the only way to not be invested in eeeeeevil oil is to not be invested in anything.

Most places don’t follow this reductio ab absurdum. Except, Portland, Oregon did.


Portland to stop corporate investing despite Mayor Ted Wheeler’s opposition

Portland is getting out of corporate investing altogether. The Portland City Council voted unanimously on Wednesday to end the practice following pressure from activists to withdraw from companies that are problematic for the environment, human rights or government.

The city has $539 million invested in corporations this year, City Treasurer Jennifer Cooperman said.

Activists for months have urged the Portland City Council to divest from controversial companies. They pleaded with them in December to withdraw from Wells Fargo due to its investments in the Dakota Access Pipeline and from Caterpillar, a company that makes trucks and bulldozers, some of which they say are used to harm Palestinians in the Israel Palestine conflict.

nstead, commissioners decided not to invest it in any corporations period, in part to avoid the trouble of having to perpetually decide which corporations the city considers bad actors.

As it divests, the city will put its money in federal bonds and other non-corporate options, Cooperman said. She said the switch will cost the city at least $4.5 million a year.

“This is a win,” said Hyung Nam, a member of the city’s Socially Responsible Investment Committee tasked with looking into companies’ environmental, social and government impact scores. “The city is actually willing to lose money to their budget because they want to get out of these big corporate nightmares.”

Wheeler said he also generally opposes divestment because he sees it as a lost opportunity to influence corporations from the inside. He shared examples of times that he said he successfully changed corporate policy as state treasurer, including a time Oregon’s pension fund joined with other Chipotle Mexican Grill shareholders to oppose the bonuses and salaries of top executives. Wheeler said he also influenced the Security and Exchange Commission’s decision to require corporations to publicly disclose the ratio of their chief executive officers’ salary to that of the average employee.

Now, I was confused. They aren’t going to invest in anything for their pensions?

Evidently, that’s what they do right now.

The pay-as-you-go structure of FPDR benefits means that
the valuation is not used for:
 Establishing the funded status of the FPDR program
 Determining an actuarially calculated pre-funding contribution rate

Digging through the Portland pension files, I see that they have a $3.7 billion liability (6/30/2016, using a 2.85% discount rate)… over $100 million in benefit flows per year, and these benefit flows are projected to increase for a couple decades.

I looked at their current budget, and their annual budget is $4.3 billion. So that should be fun.


So yes, divestment is an idiotic idea. It does erode returns.

But most of these funds are hurting from undercontributions, not sub-market returns. They’re trying to reach for above-market returns and getting…. well, I’ll get to that in a future post.

So politicians and other groups playing for political purity are essentially a distraction from the need to hike up contributions. I don’t think many people will be very distracted as the tax bills hit their pockets.

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