Pension Fund Activism Threatens Workers’ Retirement Security — And Taxpayers

While the underfunding of union pensions cannot be ascribed to any one cause, there is one that is troubling because it is so avoidable: pension fund activism. This involves pension funds, acting as shareholders, introducing resolutions at corporate shareholder meetings that have little, if anything, to do with increasing shareholder value.

This runs counter to the Employee Retirement Income Security Act (ERISA), which requires pension fund managers to work solely to increase shareholder returns in order to secure workers’ retirement security. Worse, this flouting of ERISA has been directly aided by the Department of Labor (DOL). As my former colleague Vinnie Vernuccio notes:

In 1994, the Department of Labor defined the term Economically Targeted Investments (ETIs) as “investments selected for the economic benefits they create apart from their investment return to the employee benefit plan.” Rep. Jim Saxton (R-N.J.) criticized them thus: “ETIs are really PTIs—Politically Targeted Investment—and use the participants’ money in ways that would not occur except for political pressure. Who pays for this party? You do. Lower returns imply lower incomes for retirees. Unless more is paid into plans from wages or other sources, defined benefit plans cannot fulfill their promises.”

Similar to ETIs, Socially Responsible Investing (SRI) is “an investment strategy that integrates social or environmental criteria into financial analysis.” ETIs and SRI share the common theme of considering goals other than what is best for the financial value of the plan. Activist investment managers utilize the massive shares of stocks they control—but do not own—to propose and fight for proxy resolutions which may have no relation to a company’s health and profitability—or could even harm the company in the future. Resolutions can range from support for environmental causes and universal health care to opposition to Social Security reform and tax cuts.

During the Clinton administration, DOL gave the green light to ETIs and SRIs through two interpretive bulletins, IB 94-1 and IB 94-2. During the Bush administration, DOL worked to address the problem. However, regulatory fixes don’t have the permanence of legislation.

During the Bush administration, the Department of Labor reversed Reich’s liberal interpretation of ERISA’s fiduciary duty requirements and issued two new Interpretive Bulletins in 2008. The 2008 Bulletins were published to clarify DOL’s view that “‘workers’ money must be invested and used solely to provide for retirements, not for political, corporate, or other purposes.”

Interpretive Bulletin 08-1 (IB 08-1) superseded and removed IB 94-1 and limited the circumstances in which a fiduciary can consider non-economic factors when selecting investments. IB 08-1 stated that, “ERISA requires that a fiduciary act solely in the interest of the plan’s participants and beneficiaries and for the exclusive purpose of providing benefits to their participants and beneficiaries.” IB 08-1 also clarified that “fiduciaries may never subordinate the economic interests of the plan to unrelated objectives [and] fiduciary consideration of noneconomic factors should be rare and, when considered, should be documented in a manner that demonstrates compliance with ERISA’s rigorous fiduciary standards.”

Likewise, Interpretive Bulletin 08-2 (IB 08-2) superseded and removed the Clinton-era IB 94-2. IB 08-2 warned against using proxy voting to further social policy goals, stating, “[I]n creating an investment policy, a fiduciary shall consider only factors that relate to the economic interest of participants and their beneficiaries in plan assets, and shall not use an investment policy to promote myriad public policy preferences.” IB 08-2 further clarified that “plan fiduciaries risk violating the exclusive purpose rule [of ERISA] when they exercise their fiduciary authority in an attempt to further legislative, regulatory or public policy issues through the proxy process.” Interpretive Bulletins 08-1 and 08-2 marked a directional shift from the Reich DOL support of using pension funds to promote political and policy goals.

Union pension funds, which have historically used the money they control to push particular agendas, soon came out against the stricter standards. In December 2008, the Obama administration’s transition website published the AFL-CIO’s demand that DOL “rescind all 2008 guidance regarding the legal standards imposed on pension plan fiduciaries when considering investments in ‘economically targeted investments’ and ‘the exercise of shareholder rights.’” At this writing, both IB 08-1 and 08-2 remain in effect, but this could change any time.

Indeed, that is precisely what has occurred during the Obama administration. As James Copland of the Manhattan Institute notes:

In March 2011, the Office of the Inspector General of the U.S. Department of Labor suggested that union funds may be using “plan assets to support or pursue proxy proposals for personal, social, legislative, regulatory, or public policy agendas.” And in July 2011, the D.C. Circuit Court of Appeals opined that public and private employee pension funds may be “pursu[ing] self-interested objectives rather than the goal of maximizing shareholder value.”

An analysis of data from the Manhattan Institute’s Proxy Monitor database, which catalogs shareholder proposals submitted to America’s largest publicly held corporations, suggests that unions’ funds may well be acting for reasons other than increasing the value of their shares. Labor funds disproportionately sponsor proposals related to executive compensation or seeking to separate companies’ chairman and CEO positions — proposals particularly sensitive to corporate leaders since they directly target management’s pay or control, respectively.

Employee pension funds also tend to introduce more shareholder proposals at companies that are the ongoing targets of union-organizing campaigns.

The longer this goes on, the worse pension underfunding will get. Congress needs to strengthen ERISA definition of fiduciary duty to allow for no wiggle room for the use pension fund monies for political purposes. Otherwise, they will likely see union officials asking for bailouts.