Investment Activism Leads Pension Funds to “Point of No Returns”

What would you say is the main responsibility of a pension fund? If you came up with the intuitive “to pay out pensions,” you’re right. Unfortunately, too many pension fund managers seem to treat their role as a soapbox for advocating their personal beliefs using other people’s money. And “Point of No Returns,” a report released this week by the American Council for Capital Formation (ACCF), found that California pensioners and taxpayers will be paying the price for this investment activism.

The California Public Employees Retirement System (CalPERS) is the nation’s largest public pension fund, serving almost 2 million retirees—which include former firefighters, police officers, and teachers who rely upon their pensions.

The leadership of CalPERS, however, has spent the last 10 years increasingly dabbling in environmental, social and governance (ESG) activism with their pension funds. During that same time period, they have virtue-signaled their way from “a $3 billion pension surplus in 2007 to a $138 billion deficit today,” according to ACCF. Much of that deficit has resulted from underperforming funds, and it turns out that “CalPERS’s environmental-related investments comprised four of its nine worst performing private equity funds last year.”

The kicker is that while California taxpayers are expected to make up for this financial malfeasance, “none of the system’s leaders put their own money into environmental investments.” So while they were destroying the retirement security of millions, they weren’t willing to accept lower returns themselves.

This grim situation would be made substantially worse if activist calls for divesting from oil and natural gas succeed. Research from University of Chicago Law School Prof. Daniel R. Fischel found that divestment by CalPERS could result in “reductions in returns ranging from $2.3 to $3.1 trillion over 50 years, and up to $290 million annually.”

Pension funds have a fiduciary responsibility to make sound investment decisions that lead to the highest returns for retirees. The dire state of CalPERS’s fund should serve as a warning and a wake-up call for pension fund managers tempted to pursue activist-driven investment strategies.