Editor’s note: This commentary is by Rep. Robert Bancroft, of Westford, a Republican who represents the Chittenden 8-3 District in the Vermont House of Representatives.
[A]s an economist by training, I understand that the investment decision-making practices that regulate state pension funds have grown more complex over the years. However, Gov. Peter Shumlin is asking the state pension fund to break with long-standing policy to pursue an investment strategy that is wholly inconsistent with the stated fiduciary responsibility of the Vermont Pension Investment Committee. I urge Vermonters to understand that the irreversible costs associated with divestment will ultimately put pension plan beneficiaries’ assets at risk. Despite these known costs, some legislators have insisted on leveraging divestment as a political statement and, by doing so, threaten to violate the established definition of fiduciary responsibility.
According to the Department of Labor (DOL) — the federal unit tasked with the interpretation and enforcement of the Employee Retirement Income Security Act (ERISA) — the definition of fiduciary responsibility is based purely on the economic benefit of the pensioners. The DOL states:
“The primary responsibility of fiduciaries is to run the plan solely in the interest of participants and beneficiaries and for the exclusive purpose of providing benefits and paying plan expenses. Fiduciaries must act prudently and must diversify the plan’s investments in order to minimize the risk of large losses.”
Instead of working towards a balanced, diversified portfolio that will secure state employees’ retirement benefits, the governor and pro-divestment organizations are utilizing environmental and social ideals to exert political pressure on specific companies and products. But the current divestment campaign has faced strong opposition from financial experts for years. State Treasurer Beth Pearce has made it clear that divestment would “undermine the prudent process” put in place by ERISA and violate fiduciary responsibility to the pensioners. According to state calculations, fossil-fuel divestment would cost the Vermont state pension fund $10 million per year in lost returns and $8.5 million in transactional costs which can never be returned.
In Vermont, some are attempting to flip ERISA on its head: Investments are being evaluated solely based on environmental and social governance factors, regardless of the financial harm it would inflict on the pension portfolio.
At the latest VPIC meeting, lawyers specializing in public employee pension funds testified that proposed divestment from fossil fuels directly threatens the security and mandate of the ERISA. At the hearing, Robert Klausner, Principal of Klausner, Kaufman, Jensen & Levinson, explained that the push for divestment in Vermont is a clear violation of fiduciary responsibility as it has a “material, adverse effect on any objective measure.” He explained:
“It is precisely for this reason that divestment, for non-economic reasons, is a disfavored strategy. Divestment has a real cost which can only be made up, in the final analysis by a greater burden on the pension plan sponsors.”
The ERISA is violated when non-economic factors like environmental and social governance are misused and misinterpreted to the tangible economic detriment of the plans’ beneficiaries. At the hearing the lawyers at Morgan, Lewis & Brockius LLP also testified that the DOL’s most recent position states environmental and social governance factors should be used, “solely to evaluate the economic benefits of investments and identify economically superior investments.”
In Vermont, some are attempting to flip ERISA on its head: Investments are being evaluated solely based on environmental and social governance factors, regardless of the financial harm it would inflict on the pension portfolio. And in nearly all cases of divestment, the costs are high. University of Chicago Law School professor Daniel Fischel released a study that found that total university portfolios divested from energy equities generated annual losses of $3.2 billion per year, not including high management fees loses.
Fortunately, the VPIC has dutifully rejected multiple appeals for divestment as a result of these high costs and financial risks. Instead the VPIC subcommittee and Treasurer Pearce have committed to analyzing and studying divestment alongside several interested groups like the Vermont State Employees Association.
It is my hope the subcommittee will be hearing from responsible economists who will represent and protect the financial well-being and interests of Vermont pensioners. After all, the treasurer and investment committee are entrusted with fiduciary responsibility to make decisions that will benefit the economic viability of pension plans, not weaken them.
If returns to beneficiaries are not upheld first and foremost, then the pension fund has violated its principle promise to help retirees obtain financial security in retirement. While environmental and social factors are good guidelines for investment managers, divestment for political purposes could never meet the true definition of fiduciary responsibility if it results in lost returns and substantial transaction fees.
