Unfortunately, legislation currently pending in the Texas legislature in SB 13, a bill to prohibit state-run pensions from investing in companies that discriminate against the fossil fuel industry, would force pension managers to violate their fiduciaries and thereby put the savings of firefighters, teachers, policemen and others at serious risk. This legislation directly inserts someone’s political agenda into a process that should be focused solely on securing the best investments and the best returns for its retirees.
When a pension manager undertakes to secure the pension savings of retirees, he or she undertakes a fiduciary duty. Fiduciary duties were developed in law to govern situations in which the wealth of another, at times an unsophisticated or infirm party, is managed by an agent.
The agent is required by fiduciary law to put the principal’s needs strictly first. The law treats fiduciary relationships seriously. Secret profits, for example, are not allowed, even if they don’t take away from the principal’s interest. Think of an attorney and his client, a guardian and her ward, or an executor and the beneficiaries of an estate.
The principal is totally dependent on the agent’s skill and has little ability, skill or inclination to monitor the agent. In this case, pension managers are similarly deemed fiduciaries. Retirees may not have the time or the financial training to monitor the stewardship of their investments, and so this strict fiduciary responsibility is placed on investment managers to ensure their focus on making the investment’s value grow is laser focused.
At the same time that public pensions are under severe pressure because of unrealistic benefit commitments, they are increasingly making forays into political advocacy. The California and New York pension funds are notorious for using their investments, made using funds that belong to future retirees, to wage political campaigns at the firms in which they invest about political issues such as climate change.
The fact that some progressive political leaders have distracted the attention of some pension funds to focus on political goals, to the detriment of shareholder returns and in violation of their fiduciary duties, does not justify the present proposal. Two wrongs don’t make a right. It is equally a violation of this core fiduciary duty to use pension capital to support conservative causes as it is to do so in support of progressive causes.
Texas has done a tremendous job recruiting business leaving states like California and New York, states where political abuse of trusted pension funds is common. The Texas state government would do well to stick with the free-market approach that has been key to its success rather than follow New York and California’s bad example in politicizing pension decisions, as SB 13 would do.
And other states should avoid pursuing similar, short-sighted legislative proposals that codify prioritizing political agendas in making pension fund decisions, while putting millions of fixed-income retirees’ pensions at risk.
While I appreciate the frustration that Texans working in the fossil fuel industry may feel about those tactics, the logic behind this bill is flawed. One fiduciary violation does not cancel out another fiduciary violation. And if the Texas legislature is insisting on pursuing this law, then state Comptroller Glenn Hegar and others must take steps to protect the retirement savings of millions of pensioners — many of whom put their lives on the line serving and protecting the public for years.
The focus of the pension manager must remain a sharp, near obsessive focus on maximizing the risk-adjusted returns of the pension. Pension managers who want to get involved in political causes should do so on their own time and on their own dime.
Pension funds will be under enough strain in coming years, as excessive defined benefit commitments underfunded by state and local governments made to retiring baby boomers rams up against ever slowing population growth. The last thing pension managers need is to be distracted into playing politics with their pensions, as this legislation would do.
The language and definitions in the bill leave much to interpretation, and it seems very likely that once it is signed into law, the courts will be asked to review the legality of state-mandated divestment as envisioned by SB 13. It seems likely, based on similar cases dealing with anti-BDS divestment, that the law could be stripped of much of its teeth, ultimately demonstrating much of this exercise as folly.
In the end, this bill is little more than signaling legislation intended to make a point. But to the extent that it leaves pension managers feeling pressured to use their discretion in ways that ignore profit maximization, it may end up doing real harm to retirees.
J.W. Verret is an associate professor of law at the Antonin Scalia Law School at George Mason University.
Read More: Texas pension bill plays politics with retirees’ money