The Institute for Pension Fund Integrity (IPFI) released a white paper this week, repudiating the divestment movement and reiterating the organization’s hardline stance against investment strategies fueled by political trends. IPFI’s decision to release the paper follows the New York City comptroller’s Request for Proposals in support of the city’s intended divestment strategy for three of the city’s five public pension funds. Given the numerous studies that have shown divestment to be both futile and detrimental to the financial health of pension funds, including our own recently released report by Professor Fischel of the University of Chicago, IPFI was understandably frustrated with the continued pressure surrounding the issue.
To convey this frustration, IPFI submitted a report detailing their argument against divestment. Unfortunately, New York City disregarded IPFI’s assessment of divestment as an invalid investment strategy. In response, IPFI Chairman and former Connecticut State Treasurer, Christopher Burnham released this statement of rebuke:
“Hundreds of thousands of New Yorkers depend on the city to ensure their financial security and deserve a secure retirement. By moving forward with their plans for divestment, Mayor de Blasio and Comptroller Stringer are using these retirees as pawns in their political games (….) de Blasio and Stringer are abdicating their fiduciary responsibility by furthering their divestment scheme, and it’s time that retirees demand that they focus on growing returns – not playing politics.”
Decidedly, the organization released this white paper to demonstrate divestment’s uselessness and fiscal danger. From the paper:
“While IPFI as an organization steadfastly opposes any plan that politicizes a public pension fund, the issue of divestment requires a closer look, particularly in light of divestment’s costly effects on pensioners and their retirement savings. The public deserves to know the facts about this misguided strategy. “
Calling out politicians and activists for using pension funds and pension beneficiaries as “political pawns in a highly polarized and partisan political battle,” IPFI argued that social and political motives for divestment fall out of the financial purview of pension funds. Rather, divestment is instead a public relations function intended to damage a company’s reputation and, according to the white paper, the maneuver is “ineffective” as a means of creating the change activists claim to be fighting for.
To demonstrate the detriment of divestment, the white paper examines key states currently entrenched in this debate, with particular attention to Colorado, California and New York. Citing Professor Daniel Fischel’s analysis of the Colorado Public Employee Retirement Association (PERA), the paper concludes that the astronomical costs are certainly not worth the limited to non-existent benefits. According to Professor Fischel:
“Colorado’s cost of divestment ranges from $36 million to $50 million per year. As this compounds, the scholar determined that over 50 years, fossil fuel divestment could lead to a 10-12% fund shortfall, or a net loss of a whopping $646 billion dollars.”
Divestment Facts has never been shy about highlighting the cost of divestment, especially in New York. In June of last year, we highlighted a different report by Professor Fischel’s examining California Public Employees’ Retirement System (CalPERS) as well as municipal funds in New York City, Chicago and San Francisco and our findings acquiesced the unfavorable findings of IPFI: Divestment would cost New Yorkers millions and Mayor Bill de Blasio’s insistence that this be an investment strategy contradicts the greater desire of their constituency with 4 out of 5 of New Yorkers believing the city’s only consideration should be its fiduciary duty to its public servants. From the white paper:
“The implications of such an action, however, could be massively detrimental to NYC pensioners who are already in an increasingly precarious situation. New York City’s various funds are only funded at about 70 percent of what is necessary to pay promised benefits.”
Such a conclusion is unsurprising, of course, given Professor Fischel’s iteration of similar sentiments just month’s later regarding New York state:
“For New York’s $190 billion pension, the expected annual cost of divestment ranged from $136 million for narrow divestment to $198 million under the broad strategy. To put these numbers into perspective, the average pension for retirees in the Employee’s Retirement System (ERS) was $23,026 in FY 2017. A $198 million loss due to divestment equals the yearly pension payments for 8,598 ERS retirees. Over 50 years, the costs of divestment for New York State add up to $1.1 trillion under the narrow approach and $1.5 trillion under the broad approach. To make up for the substantial shortfall caused by divestment, the State will either have to lower pension payouts or seek new revenue from taxpayers.”
The writing is on the wall, whether activists want to read it or not – divestment is not a viable investment strategy, particularly in states with pensions that are already underfunded and underserved. The sentiments expressed by IPFI are symptomatic of a frustration mounting by institutions, universities and pension funds that have consistently rejected divestment, citing what we already know.
Divestment is an outlier of fiduciary duty – bottom line. The sooner this fact is accepted, the sooner we can move forward and collectively act on real solutions for change.