The Pain and Possibility of Pensions

J. PATRICK PATTERSON: Pensions hold an enormous pool of public capital at a moment when private equity and mega corporations dominate the global economy. What role should pensions play, and what’s standing in the way?

BRAD LANDER: Our first priority, and our fiduciary duty, is guaranteeing retirement security for public sector workers, for the teachers and firefighters and public hospital nurses and school crossing guards in New York City. That’s critical right now with what’s happening at the federal level, with workers losing their rights to collectively bargain. Our fiduciary obligation is not only a legal obligation, but a deep expression of our commitment to public sector workers. 

We are not day traders, and to trade long-term retirement security with all the risks — that includes in climate, in thriving workplaces, in an inclusive economy — to close your eyes to that broad set of risks would be a dereliction of duty. So that means paying attention to environmental, social and governance risks, and that has added up to an approach that has been one of the foundations of a thriving U.S. economy. 

People who wreck the foundations of responsible investing for either short-term gains or crass political purposes really do risk the long-term stability of the U.S. economy and the people who depend on it.

MULLISSA WILLETTE: I always start with the basics. What are public pensions? They’re not gifts; they’re not handouts. They’re deferred wages. They’re things that workers collectively bargain for and said, ​“I will do this today for that tomorrow.” They are the earnings of teachers, of county employees, nurses, bus drivers, custodians in the hospital. Those are already the people, before their pension comes into play, who are holding up our economy and who are keeping our communities running. I know at CalPERS, the majority of our workers are Black, brown and AAPI [Asian American Pacific Islander] women who are already the keystones of their home economies. 

There have been studies showing that pensions are one of the most effective tools we have to break cycles of wealth inequality for Black and brown communities and for many workers of color who’ve been systemically excluded from wealth-building opportunities. For some, a secure pension is the difference between retiring with dignity or retiring in poverty. Understanding that retirement system as one of the few pathways to intergenerational security for working families makes our responsibility on that long-term sustainability really important. 

I also want to credit Jon Lukomnik, because he literally wrote the book on it. Our investment returns are largely driven by ​“beta,” the performance of the overall market, not individual stock selection. So that means chasing high returns through complex, high-fee strategies doesn’t protect our members from systemic risks. 

LANDER: I also really value Jon Lukomnik’s analysis here. ​“Alpha” is the outperformance risk-return of an individual investment; beta, as Mullissa explained, is about systemic risk. We’re broadly invested all across the economy, so it really is the thriving of the economy that is the key to our ability to meet our obligations in a way that is not true for many other investors. 

Lukomnik did some analysis, before I got here, that showed how, in New York City, opening up proxy ballot access helped improve returns across the economy, and how things like climate risk or inequality or lack of inclusion are broad economic risks if not addressed, and gains when addressed. That’s something that universal investors, like public pension funds, have a unique responsibility and opportunity to make a difference on.

EVAN SUTTON: I think we need to acknowledge up front that public pensions have an activist interest. If we can’t protect public sector jobs and make public sector jobs safe jobs, then the public pensions will disappear and the public jobs disappear. 

In New York City, we saw the teachers unions really pushing for moving money out of hedge funds that were using profits to attack teachers unions and other public sector unions. And that’s actually pushing companies to better policies, so that if you want the investment of the public sector unions — which have vast resources — then you are, at minimum, not harming public sector workers.

I would love to see more public sector pensions really looking at how they can leverage investment to keep companies from engaging in the kind of behavior we’ve seen, for example, from Tesla and its CEO, where there’s tens of billions in public pension money nationwide invested. But Tesla’s CEO has perhaps done the single most damaging act we’ve seen to public employees, in dropping huge amounts of money to elect this administration, in supporting farright candidates going after public workers, and there’s a lesson that can be taught, even if it’s on the backside.

PATTERSON: Fees and private equity and hedge funds can drain retirement funds. How big of a problem do you see here?

WILLETTE: I believe that you pay people for the job that’s done. So if a manager can get us phenomenal returns — without exploiting the workforce, without exploiting the climate and the planet, without destroying the economy — then I’m happy to pay them for that. 

But as a trustee, I find it’s very, very difficult when the fee structures are very opaque. Don’t underestimate showing up and asking the questions. We have to demand transparency. We have to require full disclosure not just of the fees, but how the investment was made, where we’re losing money, how performance incentives are calculated, evaluating whether there is unnecessary risk. It also means we have to walk away from deals that don’t meet those standards, which is hard because of the work and the relationships built just to get to that level of information.

LANDER: A challenge in general is that you pay much higher fees in private markets than in public markets, which is fine, so long as your returns — net of fees — are still delivering. 

Responsible investing in private markets uses different tools and looks different than it does in public markets, but we’ve had many of our most significant impacts through our private markets investments. For many years, for example, the Venetian hotel was the one big nonunion hotel on the strip in Las Vegas. Sheldon Adelson owned it. His widow put it up for sale after he died, and Apollo Global Management bought it. Apollo was coming to us for a big re-up right as that was happening, and we were able to say to Apollo, ​“It’s going to be very hard to get our members to vote for a re-up.” So they entered into a neutrality agreement with the culinary and the other unions there, and now more than 4,000 workers have a good union contract. So that’s a different approach than we would take through a shareholder resolution.

PATTERSON: What other barriers do you see in moving money away from high-fee products?

WILLETTE: Things like the corporate code haven’t kept up with today’s legislative changes. Policy is usually just codifying what’s already happening, and new ways of extracting from workers are created every day. 

Even what you think is sacrosanct in terms of the National Labor Relations Act — we don’t know what the NLRA is going to look like a year from now, let alone 10 years from now. So we have to be evolving. And I think being held to yesterday’s standards in today’s environment is one of the biggest barriers. 

We also don’t talk enough with our members about it, and they’re not at the gates demanding change.

PATTERSON: What does that actually look like — for a union to get its membership informed?

WILLETTE: Every time I think I understand how some unions are structured, we learn new structures of new unions, and that’s beautiful — because if they’re democratic and members are building their power, then there’s no wrong route. 

I started out working for a public agency, and I live in the Bay Area in California. I got my first paycheck and said, ​“Why is this huge amount of money being taken out? I need to opt out of that.” And I was told, ​“Nope. That’s your pension benefit, it’s there so you don’t end up a client of a social services agency when you retire.” And I learned what a pension was. 

So — new employee orientation, first paycheck, unions can be talking to their members all the time. You can create the space; if it doesn’t exist, use a space that already exists. Anytime we talk about collective bargaining, anytime you talk about the topic of the day, I could probably turn it into a pension conversation.

This stuff isn’t fun, and I think it was meant to be that way, by design. But there’s not anyone who says, ​“Nope, that’s too complicated for me.” We can’t let Wall Street, or even private assets, be so complex that they’re untouchable, because that’s what’s happened. If we can explain what we want to a Wall Street consultant, then we can explain it to the people whose money it is we’re managing.

SUTTON: And if members don’t understand their money is being invested through hedge funds and private equity firms siphoning off vast amounts of money, then members will never make their voices heard. 

The reality is, with the amount of money that even mediumsized public pensions have to invest, you have enormous leverage. And there will be a hedge fund or private equity firm that can deliver the same results that will be happy to take that investment money at a lower fee. 

What has happened too is that pension boards have developed policies to tie their own hands. For example, in Wisconsin, the statewide pension decided, ​“We don’t divest from anything because we don’t want to have to deal with constant calls to divest from this thing or that thing.” And while I understand the urge, I also think that having folks like Brad and Mullissa in these positions — who actually think about leverage and think about the role that activism can play to benefit the pension — is really important. 

Pensions need to think of themselves not just as fiduciaries, but as political implements. Part of that is using the leverage in the investments being made.

PATTERSON: Does that not risk politicizing pensions?

LANDER: Four of our five funds are structured so that half the votes are the public sector and the other half are representatives of the unions. The union members on those funds represent the workers, and they care about the retirement security they’re elected to protect. And they bring a real, thoughtful, fiduciary approach, and that may wind up looking different to some of those different members. It is entirely possible to take those seriously and clearly, with a clear responsible investing approach. Having representatives of the workers — whose retirement security is at the table — is a strong part of doing that

PATTERSON: But your role is not just with pensions; it’s with taxpayer dollars. Where do you see a line between what pensions can do responsibly and what really requires public budgets?

LANDER: You can’t use pension as subsidy. Subsidy is like— a foundation giving the money away. But this isn’t our money to give away. If we were to give it away, not only would that be a legal violation, but it wouldn’t be there for the workers it’s promised to. 

But there is a strong role for investment dollars in helping move forward the kinds of things that New Yorkers, including those workers, need. We have an authorization to invest up to 2% of our portfolio in economically targeted investments — which has historically meant affordable housing and small business — that will earn returns and also strengthen the New York City economy, to make it more inclusive and address capital gaps. We are looking right now at whether it’s possible to broaden that out somewhat, to do more climate investing or meet other needs.

SUTTON: This is one of the places where there’s been some really interesting and creative thinking about ways money can be used for social good. When I was at the American Federation of Teachers, we were in the middle of a major project where AFT and the New York teachers’ pension had invested in the rebuild of LaGuardia Airport Terminal B. That project led to something in the neighborhood of 15,000 good union jobs. Part of the investment strategy was helping secure a really strong project labor agreement to ensure those jobs were going to qualified union construction workers in the skilled trades, but it’s also returning an investment. 

Another really interesting example is where a company provides down payment assistance to qualified workers, because that’s often the single greatest obstacle, even if you could pay the mortgage. And then, within a certain period, you either have to sell or refinance, and the company takes a cut of the increased value of the home. Of course, if the home has lost value, then the company takes a little bit of a bath, so like all other investment, it’s a gamble on the market to grow. But that, for example, could be a triple investment into the union member — the member’s money to get into a home, built by member wealth, going to return the investment into the member’s pension.

WILLETTE: And when the member buys their home, that would keep the member in that job for longer, and that helps recruitment, which costs the taxpayers less. We have better quality jobs, because historic information stays on the job when people stay in that job. So it creates a stronger sense of community, and then people vote where they work and live, which creates better patterns of outcome.

PATTERSON: One of the greatest financial risks of our time is climate change, but some say ESG investing — for environmental, social and governance criteria — is mostly greenwashing. If responsible investing can’t deliver, what role should pensions play in addressing climate risk?

LANDER: We have one of the boldest decarbonization plans for U.S. public pension funds. We divested fossil fuel reserve owners from our public equities coming up on five years ago, and we have found that has been a good investment. We’re a year ahead of our goal of being net zero by 2040. We have seen good returns in our renewables and are proud of the ways the returns have aligned with that. 

But I am really worried here that red state treasurers and elected officials have brought more pressure to bear, scaring the asset managers out of the clear recognition that climate risk is financial risk, and therefore backing off. We required all of our public markets asset managers to give us their decarbonization plans by June 30, and we’re reviewing them now. We’re requiring all our private markets managers to do the same by next June 30, and we’ve been clearer with them. If managers aren’t taking appropriate steps that are aligned with our goals, then we’re going to have to bid out their mandates and look for managers who are. 

A big European pension fund pulled a $17 billion mandate from BlackRock this week, precisely over concerns about BlackRock’s walk-back on climate.

PATTERSON: Is it actually possible to divest? If we’re not investing in fossil fuels, where should we invest?

SUTTON: I would love to see every public pension fund divested from fossil fuels, but you do get into some really weird territory. Tesla, again, is an example of an environmentally responsible company, and arguably Tesla pushed the auto industry into more electrification. Tesla also made tons of money selling other companies its climate credits so they could continue building an outsized number of dirty cars — so was it just robbing Peter to pay Paul? And that’s not even getting into Tesla’s own labor and environmental practices around construction and rare earth minerals. 

There are blue chip stocks that are, for example, insurance companies. Is it responsible to be invested in insurance companies when a large-scale climate disaster could make even the largest insurance companies insolvent? Or when those companies are refusing to underwrite homes in large sections of places like California? 

I don’t think there’s an easy answer. I do think, if you’re going to take a risk in investing, then take it on things that can make the world better while delivering a good result.

WILLETTE: I always want to frame it as — whose money is this and what would they say about these investments? Workers know the impact of climate change, and it’s their money. We have workers in parks departments who literally feel the heat of the day. We have workers who have families on farms in California. 

I also know fossil fuel is plastics, it’s lipstick, it’s a lot more than the coal plant in Ohio. It’s huge. Can our economy survive that divestment? I have workers who contribute to CalPERS, who live and work for the city of Bakersfield, an economy really reliant on the fossil fuel industry. So what jobs do they do if the fossil fuel industry is removed, and what’s left for a roads worker? A social worker? We have to fly the plane while we build it. We have to invest in the new work and the new standards while also divesting. 

But I don’t like using the word divestment, because it’s an investment decision. If I invest in one thing or another, that’s the investment decision. I didn’t divest from one thing and then something else. As a fiduciary, our fund has to sustainably generate returns, and we can only do that if the companies we invest in have repeatable business practices that will sustain that value. And we know we are going to run out of oil, that those coal plants are going to explode. If we don’t have a company that has repeatable, sustainable, long-term business practices, we shouldn’t be invested in that company.

LANDER: Red state treasurers and MAGA interests are both doing the bidding of their fossil fuel donors and trying to force people to keep burning capital up by burning fossil fuels, and at the same time, trying to force on everyone a short-term approach. They are, therefore, really jeopardizing the foundations on which American capital markets and shareholder governance rest. Public sector workers in red states need the same things our workers do. And I think this is an opportunity for people to really loudly push back.

PATTERSON: Can pensions realistically push back, or do they just reinforce corporate power, in the sense that concentrated corporate power undermines democracy?

SUTTON: I do think pension funds have the opportunity to countervail corporate power. You don’t have external investors in a pension fund, so there’s not really an apples to apples comparison there. The Venetian finally unionizing is a perfect example of one way to do it. 

And if we want to survive the moment, we’re going to need a lot more people like Mullissa and Brad who are ready and willing to actually wield that money as power.

LANDER: The movement of capital into the economy — and whether it cares about whether the planet burns up, whether it cares about workers, about inclusion in the economy regardless of race or background, having an opportunity to get capital to start smart businesses and innovate — has a huge impact on what the future of the economy will be.

WILLETTE: So we have to invest in strategies that support, not undermine, the workers whose pension we’re trying to serve. There are a lot of examples of corporate power that erodes the workers’, whose money it is. As a public sector trustee, investing in a company that privatizes public goods or public services would go against my fiduciary duty to protect the public workers’ retirement security. 

We need to not leave anything off the table just because it hasn’t been done before. Housing, the energy grid, highspeed internet lines — there’s a lot of investment opportunity in new technology, for example, that would benefit workers and benefit our communities.