Gun Debate Revives the Pension-Investment Dispute

When there’s public outcry over something -- whether it’s gun control or apartheid -- states and cities reevaluate what their pension plans invest in. But should they be social investing at all?
May 2013

After last year’s mass shootings in Aurora, Colo., and Newtown, Conn., several state and local officials sat down and took a good look at their pension portfolios. Was it responsible, they asked, for the public to support gun manufacturers, especially when guns were being used to cause so much violence?

For state officials in California and New York and mayors in Chicago and Philadelphia, the answer was no. They, along with other cities and states, have announced plans to purge their portfolios of firearm companies. It’s called social investing -- or disinvesting -- and it has a long history.

Read the May issue of Governing magazine.

When there was an outcry against apartheid in the 1980s, a number of public pension plans dumped the stock of companies doing business in South Africa. Several cities divested from companies involved with the Sudan after reports of genocide in Darfur. More recently, a number of pension plans have refused to invest in companies that deal in tobacco or alcohol.

Social investing taps into highly emotional issues, and tries to turn that emotion into action. In Chicago, Mayor Rahm Emanuel has been agitating for the city’s five pension funds to divest from firearm manufacturers, saying, “We cannot support or invest in companies that profit from the proliferation of assault weapons and the violence these guns bring to our communities.”

For New York City Public Advocate Bill de Blasio, a trustee for the city’s $43.3 billion employee retirement system, “it’s a bad investment to put money behind companies that put military-grade weapons on our streets and refuse to take responsibility for the outcome,” as he told the Associated Press. “We should not be giving capital to an industry that is responsible for the deaths of thousands of Americans each year.”

But is social investing fiscally responsible? Research suggests that funds that screen out companies based on social values tend to perform just as well as unscreened portfolios. At the same time, some individual funds’ returns have been harmed by value-screening.

Alicia Munnell, director of the Center for Retirement Research at Boston College, is an outspoken critic of social investing. After years of social investment decisions in regard to South Africa, the Sudan and other countries and causes, Munnell sees fiscal peril in forcing portfolio managers to add non-monetary considerations to investment decisions. “Introducing another dimension creates a risk that portfolio managers will take their eyes off the prize of maximum returns and undermine investment performance.”

As she sees it, the people making the social investment decisions are not the people who will bear the burden if anything goes wrong. “If divestiture produces losses either through higher administrative costs or lower returns,” she says, “tomorrow’s taxpayers will have to ante up or future retirees will receive lower benefits.”

Private pension plans, which are governed by the Employee Retirement Income Security Act, are prohibited from social investing. Munnell believes public plans should follow suit. Not that there isn’t room for other groups to do social investing. “If rich people want to adjust their own portfolios, that is perfectly reasonable,” she says. “But for public plans to do it is not.”

Social investment advocates argue they have a moral responsibility to society. As Chicago Alderman Will Burns put it earlier this year, “The damage caused by these weapons is far greater than any return on investment.”

It’s a strong argument, and one that Munnell says makes her position “not a pleasant one.” When the genocides in Darfur were occurring and pension plans were talking of disinvesting, Munnell disagreed vocally with that policy. “I sounded pro-genocide. Now I sound anti-gun control. I’m neither. I just don’t think social investing is effective. It can harm the performance of public plans.”

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