Ohio - Not SO Fast

Earlier this year, it was reported that Ohio's legislature and pension systems had reached an "innovative" compromise to divest one half of their investments linked to Iran or Sudan. The divestment was to be limited to active international equity and fixed income portfolios with year end 2007 stated as a target date.

Several issues came to our mind: what about the other half of the investments linked to Iran or Sudan? What about the other classes of portfolios? It was in our eyes, the worst kind of half measure. We thought that at best, it would be expensive, time consuming, performance detracting, and totally devoid of even symbolic meaning.

Since then, some of Ohio's pension funds have moved in creative and smart ways to limit the impact of the agreement. Retirees and State Employees have rightly complained that their retirements should not be linked to NATIONAL foreign policy. The State Teachers' Retirement System has undertaken what appears to be a thoughtful study to understand the potential divestment costs to the fund and clarify their fiduciary liability. My favorite part of the draft policy reads: "State Teachers' Retirement System of Ohio would not divest of a restricted security in Iran or Sudan unless a comparable substitute of risk and return, including transactions costs, is available." Nicely done. They also asked the Attorney General to provide a written opinion on any conflict between the draft policy and the board's fiduciary duty.

See a good article on the topic at PlanSponsor.com (free subscription required)

Study Casts Suspicious Eye on Social Investing

A study conducted by Alicia H. Munnell, the Director of the Center for Retirement Research at Boston College, asserts that public pension fund divestment may not be a useful strategy to combat genocide and terrorism.

As of 2005, 80.0% of investors using social screens in their investment process were public pension funds. On the contrary, private pension plans only accounted for 9.1% of investor assets utilizing social screens. The report states that one potential reason for lower participation in social investing among private pension plans is that plans operate under the Employee Retirement Income Security Act (ERISA). ERISA requires a fiduciary to act “solely in the interest of the participants and beneficiaries…for the exclusive purpose” of providing benefits to them. From a fiduciary standpoint, trustees of public pension plans are frequently asked to forgo duties to beneficiaries to comply with ancillary objectives.

The article goes on to refute the claim that social investing has a financial impact on the companies facing divestiture. The author stresses that “boycotting tobacco stocks or international companies doing business in Sudan or Iran may result in a temporary fall in the stock price, but as long as some buyers remain they can swoop in, purchase the stock, and make money.” Investors, unencumbered with social investing restrictions, will demand more company shares as the stock price declines due to forced pension divestment. However, the financial impact of divestment will be brief as price-minded buyers step in to buy shares. In the end, the short-term impact goes unnoticed by the intended target companies.

The article concludes by stating the decision makers (politicians) are not the group that will be ultimately responsible for losses sustained as a result of divestment mandates, but future generations of taxpayers who will be forced to cover pension losses.