Gambling On Your Future

Here is another reason we need to democratize defined benefit pension plans, whether run by the government or through our employers. While these institutional funds talk about the need for shareholder democracy; they deny the same to us.

They are using their vast reserves of captial now to play the market place investing in risky enterprises like hedge funds and private equity funds.

Canada's three-largest pension fund managers, unable to meet the long-term needs of retirees with returns from stocks and bonds, plan to increase private-equity investments after spending about C$50 billion ($47 billion) buying companies, toll roads and gas pipelines.

The pension funds added C$31.7 billion to private equity holdings in their most recent fiscal year, almost double the amount of the previous 12 months. The retirement plans are buying riskier assets because they don't expect publicly traded securities to provide high enough returns to pay the more than C$1.56 trillion of benefits owed to retirees over the next 50 years, according to annual reports from the pension funds.

The ability of workers to control, or even to influence, the investment of their deferred wages in pension funds — which are now by far the nation’s largest source of capital — is an old but recurring debate. Unions played a leading role in the creation and expansion of private pension trusts, particularly the traditional defined-benefit plans that are funded almost entirely by employer contributions.4 Yet because control over how pension assets would be invested was
never made a bargaining priority, today at least 90 percent of private sector pension fund assets are controlled exclusively by management.

Since the Second World War a number of factors have led to increased investment by institutional investors in public corporations. There has been the use of superannuation and pension schemes. There has been an increase in insurance linked investment products and other forms of indirect investment. Trustee investment rules have been relaxed, enabling trustees to invest in equities

The result is that in Australia, New Zealand, the USA and the UK more than 50% of all equities are held by institutional investors and the tendency is to increase. Add to this the traditional domination by institutions of the bond market and we have the beginning of the growth of a significant counterveiling power if the economic strength is harnessed to a common cause. Listed corporations are becoming the servants of global financial activity rather than its masters.

Peter Drucker argued that this led to a quiet revolution – ‘The Unseen Revolution...The US is the first truly Socialist country."This was simply reflecting what Berle in his later workings had identified and his research student Paul Harbrecht had called ‘The Paraproprietal Society’ – the evolution of a new form of property.

Until the late 1980s the tendency of the institutions was to be a sleeping giant. There were instances of discrete intervention but by and large the institutions voted with their feet and followed the Wall Street Walk – if in doubt, sell.

Institutions themselves came under attack and we see two developments. First, the involvement by them in promotion of improved corporate governance and secondly the use of specialist funds managers. The latter makes it more unlikely for institutions to become activists in particular companies although there have been exceptional cases where a group of funds managers have taken action.

Institutions are primarily focussed on profit and liquidity and have been attacked for short termism in their approach to companies. There is also a problem of lack of coincidence between the interests of institutions and other smaller shareholders in takeover situations. Often institutions collectively have strategically significant holdings.

Institutions sometimes encounter legal problems in increased shareholder activism.

It is sometimes argued that public sector pension funds are more likely to take a long term strategic view and certainly the US and the UK public sector funds have had a tendency at least to mouth the appropriate rhetoric.

See:

Public Pensions Fund Private Partnerships

AIM High

Golden Parachutes

Your Pension Dollars At Work

P3= Public Pension Partnerships

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