We are lucky to have people who read this blog who have experience beyond our own. I exclude a few and include myself in those for whom 1976-78 was the time of O levels or primary school or (bless you) preceding birth. This conversation happened yesterday and came out of discussions about what should be done with our pension money in 2025.
Here is Benefits Jack from Powell, Ohio, United States
Back in the states, way, way back in October 1978, Professor Harry Graham was the instructor for my MLR 601 Labor Markets class in my MBA program. We had a very brief discussion of employee ownership (ESOPs). That prompted me to ask Professor Graham: “whether pensions would someday favor social investing”. I wondered whether the plan should invest with the employees’ pecuniary interests in mind (as owners, employees, community residents, and/or US citizens).
He responded: “No”.
To the surprise of no one in the class, I bit: “Why not?” He responded: “Because the amounts at issue would never be substantial.”
In 1978, America had 443,000 retirement plans (including a handful of ESOPs) subject to ERISA (private sector pension law in effect since 1974). There were no 401k plans – the dominant DC plan today. There were 52 MM participants and $377B in assets.
Today, there are over 800,000 plans, with 140+MM participants (some participate in more than one plan), with well in excess of $12 Trillion in assets.
In the states, fiduciary duty requires managing the plan prudently, diversifying plan investments to minimize the risk of large losses, and acting solely in the best interest of participants and beneficiaries for the EXCLUSIVE purpose of providing benefits and paying expenses.
America’s ongoing debate over ESG and whether/how ERISA fiduciary duties apply to Individual Retirement Accounts continues today.
While the amounts at issue are now substantial, no one here expects the basic rules of ERISA fiduciary duties will change anytime soon.
Of all my contributors, Byron McKeeby is perhaps the most widely read, here is his response to Jack’s contention
In The Pension Fund Revolution, originally published in 1976 under the title The Unseen Revolution: How Pension Fund Socialism Came To America, a leading management philosopher Peter Drucker reported that institutional investors, especially pension funds, had become the controlling owners of America’s large companies, the country’s only capitalists, he argued.
Drucker maintained that the shift began much earlier in 1952 with the establishment of the first modern pension fund by General Motors.
By 1960 it had become so obvious to some that a group of young men decided to found a stock exchange firm catering exclusively to these new pensions investors.
Ten years later that firm (Donaldson, Lufkin & Jenrette) became the most successful, and one of the biggest, Wall Street firms. (The firm later disappeared into Credit Suisse in the year 2000.)
Drucker’s main argument, that through pension funds ownership of the means of production had become socialised without becoming nationalised, was unacceptable to conventional wisdom in the 1970s.
Even less acceptable was the second theme of his book: the aging of America.
Among the predictions made by Drucker in his updated The Pension Fund Revolution were: that a major health care issue would be longevity; that pensions and social security would be central to the American economy and society; that the retirement age would have to be extended; and that altogether American politics would increasingly be dominated by middle-class issues and the values of elderly people.
While readers of the original edition found these conclusions hard to accept, some of Drucker’s arguments have proven to be prescient.
In a new epilogue written in 1995, Drucker (who died in 2005) discussed how the increasing dominance of pension funds represented, in his view, one of the most startling power shifts in economic history.
The Pension Fund Revolution is considered by some (eg Canada’s Keith Ambachtsheer) a classic text regarding the effects of pension fund ownership on the governance of the American corporation and on the structure of the American economy.
It provided at the time a wealth of information for sociologists, economists, and political theorists, even if some of Drucker’s hopes and fears have not been fully realised.
The argument is academic and might seem unimportant. But as at this (Saturday) morning ,there have been 2429 comments on a second Telegraph article
People are infuriated (by and large) by politics imposing itself on their pensions. But this is clearly what happens. Politics gets everywhere and is the system by which we govern ourselves.
The Telegraph may give the impression that Nest’s £50bn is invested without investing in UK defence, this is nonsense, £390m is invested in an ethical fund that invests in this way. This is less than 1% of what’s in Nest’s trust. The others mentioned offer a defence free option but it again is a minority issue.
Like Benefits Jack and Byron Mckeeby, Pensions Oldie is senior in years and his comment, following a presentation by Eversheds on fiduciary issues is a fitting end to this discussion
At the NatWest Cushion event at the Mansion House, it was stated that the new Eversheds’ legal opinion stated that ” … fiduciary duty can extend to include opting for investments on the basis that there is a tangible causal link between investments and their ability to improve members’ standard of living in retirement”.
– Does national defence spending not have the ability to improve members’ standard of living in retirement?
– Which investments do not have the ability to improve members standard of living in retirement?
In my opinion the discussion about Trustees’ fiduciary duties was always an entirely an artificial academic discussion by lawyers interested in interjecting their role into trustee decision making. I doubt that any investment decision made by a trustee board following a reasonable selection process could ever be regarded as sufficiently “perverse” to be declared void by the Courts.
Henry, this is a critical issue. When the political genie, that is “we can control or nudge significant swathes of capital that already exists to our goals” is out of the bottle then we are all in trouble.
If the politicians are the driver for this, then so be it, when the industry becomes the driver we had better all understand the motives and consequences
Back in the day, one of my bosses invented the term “contribution holiday”, and i believe that law makers saw that there was free money in some DB schemes, and consequently hard-coded certain benefits with the consequence that certain flexibility was removed, to the long term detriment of DB.
I think it is important to consider the purpose behind the trustee decision is considered. Are the trustees investing to provide benefits for the members?
As Brian McKeeby pointed out yesterday the UK position is very much influenced by the 1985 case of Cowan vs Scargill where the Vice Chancellor held that the National Union of Mineworkers could not use their representation on the Trustee Board of the National Coal Board Pension Scheme to (1) cease new overseas investment (2) gradually withdraw existing overseas investments and (3) withdraw investments in industries competing with coal. All this was against the advice of the Pension Scheme’s investment committee. The Judge, Megarry VC, held the NUM trustees would be in breach of trust if they followed the instructions of the union, saying ‘the best interests of the beneficiaries are normally their best financial interests.’ So if investments of an unethical type ‘would be more beneficial to the beneficiaries than other investments, the trustees must not refrain from making the investments by virtue of the views that they hold.
Needless to say this judgement is unpopular with political activists (and perhaps politicians) who are seeking to further their goals by influencing investment decisions.
In my very humble and unlearned position effectively all Megarry was saying was that in their role a Trustee must consider all relevant matters, ignore all irrelevant matters, take advice where appropriate but challenge that advice if necessary, and come with clean hands and without prejudice to a decision that is in the interest of the members. (why oh why does TPR’s General Code only regard acting in the interest of members worthy of point 6d. on page 10 of the .pdf version). This entirely reconciles ESG investment where the Trustee considers it offers the best long term prospects with the Trumpian view that investment managers should not be mandated with political goals (or is he actually saying the opposite?).
I think most Trustee Boards get it, but perhaps we have to be wary of those where political objectives dominate.
JQ is 100% correct. This is THE critical issue. And the consequences of this political interference in the investment decisions are profound and dangerous. But the DB universe has been already operating under severe political coercion since the 2004 Act. The actuaries just didn’t realised they were being used this way. It’s been political directioning that led 90% or so of schemes to dump growth and overload on gilts even on negative real yields (how is that ever evan an investment!) and then with many multiplying that with the insanity of leveraged LDI, concentrating risk and abandoning diversification as a core tenet.
Mandation leads to Statist intervention and will ultimately lead to nationalisation of the sector (we’re half way there with 50% of private sector schemes liabilities covered by Gilts – which by the way at such concentration is the same as unfunded).
We just need the Govt to extract itself from current levels of interventionism, leave the schemes to return to investing on fundamentals. It needs to be gradual, and can be done but the rewards from an invested DB universe are enormous.
Barrister David Pollard of Wilberforce Chambers published a lengthy review of Cowan v Scargill and other cases in Trust Law International in
2018.
Pollard sought to explain the difficulties that arise when the duties on a fiduciary, such as a trustee or director, are encapsulated in the seductively simple formulation that he or she must ‘act in the best interests of the beneficiaries’.
While agreeing that this formulation has been used in many judgments, Pollard believes it runs the risk that it will (understandably) be taken literally and used out of context, by beneficiaries, in legislation, or by advisers.
A better formulation, he suggests, is to expand the wording (to bring it more into line with company law) on the following lines:
‘Trustees (or directors) must:
Broadly, exercise their powers within the terms of the trust/company constitution and for a proper purpose and for what they consider, in good faith, to be most likely to promote the success of the trust/company.’
A bit longer than the simple formulation of acting in the best interests of beneficiaries … But much less likely to mislead and confuse?
For a much deeper exploration of these issues I recommend a 2018 paper by David Pollard of Wilberforce Chambers which sought to explain the difficulties that arise when the duties on a fiduciary, such as a trustee or director, are encapsulated in the seductively simple formulation that he or she must ‘act in the best interests of the beneficiaries’.
Be warned – it’s 106 pages in length! An earlier “short-form” (sic) version ran to 119 pages …
Wilberforce Chambers agreed that this formulation of acting in the best interests of beneficiaries has been used in many court judgments, but they believe it runs the risk that it will (understandably) be taken literally and used out of context, by beneficiaries, in legislation, or by advisers.
A better formulation is suggested to expand the wording (to bring it more into line with company law) along the following lines:
‘Trustees (or directors) must: Broadly, exercise their powers within the terms of the trust/company constitution and for a proper purpose and for what they consider, in good faith, to be most likely to promote the success of the trust/company.’
A bit longer than the simple formulation of acting in the best interests of beneficiaries …
… But much less likely to mislead and confuse?
https://www.wilberforce.co.uk/wp-content/uploads/2017/12/Mad-Bad-and-Dangerous-to-Know-David-Pollard.pdf
A later paper by Sebastian Allen is also relevant:
https://www.wilberforce.co.uk/wp-content/uploads/2022/07/Fiduciaries-and-the-power-of-investment_By-S-Allen.pdf
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