Politicization hurts returns, harms retirees

The Golden State’s retired teachers have worked for years to enjoy a healthy and secure retirement. Like education, retirement is the long game. Maintaining economic security for current and future retirees requires that pension investments are made like the tortoise in the fable of the tortoise and the hare: slow and steady.

But instead of playing the long game, we have seen an increase in the politicization of public pension funds. From politically advantageous assumed rates of return and outdated mortality rates, to pursuing personal political agendas by pushing for divestment in companies that the trustees find objectionable, public pensions are veering away from their fiduciary responsibility. A divestment review began this summer within the California State Teachers Retirement System, the latest battleground for keeping politics out of pensions. Activists pressing for divestment from private prison companies are upset by the Trump administration’s immigration agenda and think that divesting from these contractors will impact the immigration debate. These activists are wrong — and CalSTRS and California retirees stand to lose if this divestment occurs (as a category, private prison companies have significantly outperformed the S&P 500 for the past 15 years).

With over $229 billion in assets as of Sept. 30, CalSTRS is the second-largest publicpension fund in the country and is only 70 percent funded. If the underfunding cannot be recouped organically through returns on investments, either taxpayers will foot the bill or retirees will lose pension benefits. If CalSTRS divests from profitable funds, either option is possible, and CalSTRS certainly would be reneging on its fiduciary responsibility.

I recently wrote for Forbes a detailed consideration of what it means to be a fiduciary. In fact, CalSTRS has a history of maintaining the fiduciary responsibility by rejecting activists and enabling fiduciaries to keep valuable investments. The reasoning then and now is identical: Divesting runs contrary to the fiduciary responsibility of its fund managers and adversely impacts returns.

Public opinion turns on a dime, and what’s to be done the next time a robust investment falls out of political favor? The fits and starts of the divestment hare cost a pension fund profit and stability. Withdrawing from a company’s stock does not change how that company does business, but it does hurt public pension retirees when a political decision reduces investment performance compared to other funds.

We have already seen what the cost was to CalPERS, the California public employees’ retirement fund, when it divested from tobacco company stocks: more than $8 billion in lost potential earnings. The same is being proposed for energy companies. To then push divestment from private prison companies, the current proposal before CalSTRS, would start a slippery slope of politicizing our pensions that knows no fiduciary bottom. Why not pick on sugar and soda companies next?

On Wednesday, CalSTRS will conclude its review and make a recommendation on the divestment question. As opinions swirl about the policies of private corrections providers, or any other company targeted by these political activists, CalSTRS fiduciaries must not allow CalSTRS to become a political action committee.

Instead of trying to invest or divest our retirement monies to either support or malign any U.S. president’s policies, please just stop using our money for political purposes.