Questions We're Asking this Week: Pensions & Community Prosperity

Pension liabilities can be a detriment to community prosperity, while pension funds can be a source of power for workers. With those dynamics in mind, here are a few pension-related questions we’re asking this week.

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Heron recently became interested in a community that seemed like it was on the upswing – the political, demographic, and financial trends that we saw all suggested that the community was on the brink of a revival.

We asked one of our fixed income managers about this place and they agreed with our analysis, but they flagged that the community still carried a multibillion-dollar unfunded pension liability. According to that manager, the community’s pension overhang is one of the biggest drags on its credit rating. Nisha Prasad, a member of Heron’s pensions work stream, provided a more detailed explanation: 

A large pension overhang can indicate that a community’s long-term financial health is in jeopardy because it is not able to pay its pensioners, so it may have to cut other spending or raise other taxes to cover those pension obligations. This worsening financial outlook causes credit agencies to lower the community’s credit rating, indicating to investors that it’s riskier to invest in. This raises that community’s cost of borrowing money in the future.

This is one of the reasons that Heron’s fixed income managers still struggle to purchase securities from that place.

That fixed income manager’s insights were unfortunately not surprising, because pension liabilities are often cited by our capital markets partners and community partners alike as a chokepoint for local prosperity. As pension liabilities grow, the need to fund them often crowds out other services for low-income people from municipal budgets. And capital markets partners (like the fixed income manager we consulted) complain that outsized pension liabilities are increasingly making it difficult to invest in the communities that carry them.

But pension funds are cited by our partners as potential allies as well. Pension funds are, by definition, closely tethered to workers — particularly the type of Main Street workers who are otherwise underrepresented on Wall Street. And organizations like the Initiative for Responsible Investment work to support systematic thinking about responsible investment by trustees in addition to making a financial return to pay for their pension benefits.

With this background in mind, Heron is currently exploring the following strategic questions:

  1. Pension Overhangs as a Chokepoint for Community Finance: Is it possible for a community to prosper despite a pension overhang? If not, what can communities with unfunded pension liabilities do to resolve them? And what are the implications of these best practices for the specific places in which Heron operates?
     
  2. Localizing Pension Spend: If a group of pensioners (for example, the local police) deliberately invests its pensions locally (in, for example, minority-owned businesses) could those investments result in greater civic capital for the community? What, if anything, are pensions doing to invest within their own communities?
     
  3. Moving Pensions from Protest to Power: Pension funds are inherently linked to Main Street workers in a way that few other asset pools on Wall Street are. With that in mind, could pensions (particularly pension trustees) wield their financial power more strategically to better serve their membership? Pension trustees are often told to steward the financial interests of their members, but can they serve the holistic needs of their members (and broader communities) as well?

Pensions play a complicated role in communities across the country. Therefore, we are looking for input as to how pensions affect people in places, and how they can ultimately be used to further mainstream prosperity. Let us know your thoughts in the comments section below.

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Discussion

Dale McCormick Mar 9, 2020 Reply

I like your use of the word “holistic” to describe the needs of the members of a pension fund and whether that Fund can invest in such a way that the members benefit holistically.

The traditional interpretation of the fiduciary duty of the trustees Is that every investment merely should make money For the members. For years Many of us Including me when I was State Treasurer of Maine and on the pension board, have tried to broaden the understanding of fiduciary duty to include more than just money earned by the fund—to include also what I am sure you mean by the word holistic: the well-being, health, future Employment etc Of members. Sometimes these things are called “externalities. “

In my short time as a member of the board of the Elmina B Sewall Foundation in Maine it seems to me that the definition of fiduciary duty in foundations can be interpreted more broadly and could consider the holistic needs of the people of Maine and externalities.

Investing in this way, (including mission aligned investing? ) would give foundations a real leadership role In showing pension funds and other investors that fiduciary duty can include a consideration of the holistic needs of the members.

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