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December 20, 2016

Divestment Activists Make another Pension Push despite Lagging Returns

In its latest attempt to convince pension funds to sell their fossil fuel holdings, 350.org supporters staged protests last week outside the New York City pension fund’s meeting to pressure Comptroller Scott Stringer to divest. Despite rejections from a number of New York schools and funds due in large part to financial considerations, 350.org’s recent effort actually touts financial concerns as a reason for divesting.  Yet as many reports and academics note, divesting imposes millions in losses due to reduced diversification benefits and increased transaction and management fees.  Given the financial state of these funds and institutions, divestment is hardly worth the risk.

Take the New York Common Retirement Fund. The Office of the New York State Comptroller is already under fire following a Department of Financial Services (DFS) report which found that the Comptroller’s decision to maintain its position in hedge funds has cost the fund a whopping $3.8 billion, largely due to underperformance and the high management fees associated with these investments.

In fact, the DFS report criticized the Comptroller’s decision to assume complex investments that resulted in losses for the pensioners, noting “Taking on asset allocations that are complex to monitor and oversee and only belatedly understanding the challenges reflects poor planning.”  As activists continue to target the city and state to divest from fossil fuels, the reality is divestment would have the same impact – increased management costs, high transaction fees, and reduced returns through diversification losses.

Perhaps this is why Comptroller DiNapoli has rejected divestment activity to date, despite increased pressure from New York City Mayor Bill de Blasio and activist groups. As DiNapoli spokesman Matt Sweeney describes:

“Given the significant impacts of fossil fuel companies on the economy and the environment, it would not be prudent to disengage from this entire industry…[DiNapoli and the fund] are aggressively engaged in building a low-carbon economy through investments and by changing corporate behavior.” (emphasis added)

The push to use pensions as a political tool is not restricted solely to New York. In Vermont, efforts to push the state to divest continue despite comments from Vermont State Treasurer Beth Pearce that divestment would state pensioners about $9 million a year in lost financial returns, not to mention an additional $8.5 million in implementation fees.

Over in California, Gov. Jerry Brown signed a coal divestment bill (S.B. 185) into law despite heavy push back.   Meanwhile, pension funds across the state and country are already facing difficulty in hitting investment targets, including CalPERS – the nation’s largest pension fund – which may have to cut its annual return target.  According to the Wall Street Journal:

“A reduction in Calpers’ return target to 7% or 7.25% would have real-life consequences for taxpayers and cities. It would likely trigger a painful increase in yearly pension bills for the towns, counties and school districts that participate in California’s state pension plan. Any loss in expected investment earnings must be made up with significantly higher annual contributions from public employers as well as the state. If the assumed rate of return fell to 7%, the state and school districts participating in Calpers would have to pay at least $15 billion more over the next 20 years, said spokeswoman Amy Morgan. That number doesn’t include cities and local agencies.”

Over in Chicago, 39 of the city’s Alderman have signed a resolution that calls for local pension funds to cease new investments in fossil fuel companies and sell any direct holdings over the next five years.  This move comes as Bloomberg reports that U.S. pension funds now face a $1.9 trillion shortfall, a gap that is only expected to grow.  Chicago’s pensions alone are short $34 billion and decreased returns have made getting into the black that much more challenging.

Still, despite these financial headwinds, divestment activists are pushing pension funds to divest, a move that would impose additional and substantial costs on these funds and, in turn, the retired men and women they support. This empty gesture simply isn’t worth the cost.