It seems that the California Public Employees’ Retirement System is having a bit of seller’s remorse regarding its decision to drop its pension fund investments in tobacco companies.
CalPERS is rethinking its 15-year policy banning investments in the industry after a study by investment advisor Wilshire Associates estimated that the ban cost CalPERS more than $3 billion in foregone profits from 2001-14.
The pension system should listen to its chief investment officer, Theodore “Ted” Eliopoulos. “In my mind, in our belief statement and in our California Constitution, our obligation as the investment office is to consider what is in the best fiduciary interests of our beneficiaries,” he explained to Pensions & Investments.
But too often CalPERS and the state’s other major pension fund, the California State Teachers’ Retirement System, have fallen prey to mixing politics and investment decisions. CalSTRS has lost $1 billion on its tobacco investment ban, which has been in place since in 2000. It also lost $600 million to $750 million after a 1987 law mandated divestment of companies doing business with then-apartheid South Africa.
Such failures have not deterred the state from engaging in additional investment activism, however. CalSTRS voted in February to divest its coal stocks, and the University of California system bowed in December to students’ demands to sell off about $30 million of its investments in companies that operate prisons. CalPERS has banned investments in certain gun and ammunition magazine manufacturers and companies that might compete with state or local government employees for contracts.
It is easy to be a “socially responsible” investor with other people’s money. But when those politically manipulated pension portfolios fail to meet the retirement systems’ lofty investment return assumptions, it jeopardizes the financial health of the systems established to provide benefits to millions of government employees and that force taxpayers to make up the difference.
We could prevent such political meddling with people’s retirement funds by simply letting government employees control their own investments through a 401(k)-style defined-contribution system like those used in the private sector. Legislators and pension board members could then fill their own retirement portfolios with all the socially and environmentally “conscious” or otherwise politically correct investments they like.
