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.