Public Pensions comprise a Public Good
Perhaps one of the most controversial challenges to MA Senate bill SD2252 (which will eventually get a new number) will come from its claim that a public pension is designed, historically, to be a public good.
Much of the dissent will come from a reasonable confusion about the many kinds of pension plans: Public vs. private pensions, defined benefit plans vs. self-directed benefits plans. Only defined benefits plans created for public service workers are held up as a public good.
Other dissent will come from the claim that a public good focus is not the “sole interest” of a public pension fiduciary. They say it’s growth at all costs, but that’s not what the law says. The law in MA says that a fiduciary must provide benefits to eligible people – without specifying how.
The bill argues that the “sole interest” of a public pension is to deliver the Pension Promise — and that comes with quantitative and qualitative considerations.
The bill exposes “growth for the sake of it” as not fiduciary. Despite what common “best practice” in the fiduciary sector might claim, there is no “duty to growth” or “duty to maximize risk-adjusted returns”.
Financial excellence is only half the job. The second half is unmet by modern fiduciary best practice: That’s managing a public good for the betterment of workers, the economy and society.
So, to be clear, this MA Senate bill links modern fiduciary duty at public pensions plans, like those for public sector workers, with their historic roots as a public good.
“Financial security for older Americans is a benefit for ‘workers, taxpayers, society and the economy’.”
Long before public pension plans grew in value to become the largest sources of public money with duty attached, public pensions were about social strategy. It was better for everyone and a compassionate gesture from the larger society to stabilize older people, rather than having them put out into the streets because they couldn’t pay for their own upkeep.
In 1878, the first modern US pension was established for New York City police officers aged 55 and with 21 years on the job. Eventually, public pensions were expanded to other jobs and sectors to encourage a rotation in the job market. In 1911, Massachusetts was the first US state to establish a pension for government workers and, by 1914, the third state to give teachers a pension, after California and North Dakota a year earlier.
The federal civil service earned a pension in 1920, in part to encourage the retirement of older, long-serving workers and encourage post-WWI job openings in the government bureaucracy. By the 1960s, problems with unregulated pensions emerged – the failure of the private Studebaker pension plan in 1963 of particular note. Regulations aimed at protecting retirees came into play in 1974 when both the Employee Benefits Security Administration and Pension Benefits Guarantee Corporation were founded.
In 1970, the Ford Foundation commissioned a report by William Cary and Craig Bright that eventually changed the way endowments and, by extension public pensions, could invest their sizable funds – switching from a narrow and conservative legal list of finance options to, among other options, speculative exchanges like Wall Street. By the 1980s and 1990s, with the flood of new fiduciary money, spreadsheets doing the complex math of derivatives and leverage buyouts, and an uptake of Modern Portfolio Theory, public pensions became a new kind of bank driven by financial excellence and forgetting their roots as a public good.
Since then, public pensions have become a major investor in oil and gas. According to a December 2021 Stand.Earth report, the Massachusetts Pension Reserves Investment Trust (PRIT) has $2.6 billion in fossil fuel investments. Across the US, $82 billion of public pension money is oil and gas investments — despite an active divestment-activist movement.
Senate Bill SD2252 asks how $2.6 billion invested today in an industry that works against the dignified retirement of eligible beneficiaries who won’t qualify for benefits until 2060, checks the box of fiduciary duty. Even without a restatement of fiduciary standards, fiduciary portfolios in MA should fail a dispassionate fiduciary review because of fiduciary duty precepts like the Duty to Impartiality. In MA, the Duty of Impartiality is not mentioned explicitly in present laws, along with other important omissions in the governing fiduciary standards that guide and protect $90 billion in holdings for a specific duty: To deliver a dignified retirement.
The potency of this legislation is to directly challenge the growth imperative as non fiduciary, to showcase the financial might of public pensions to do more with their money to protect the futures of current and future retirees, and to codify it’s role as a public good. Making those changes in law, leads to challenges of current practices and a change in focus in how billions in public money make their returns. The fiduciary focus benefits everyone, not just the eligible beneficiaries.