Second in a series of papers, the first entitled ‘Infrastructure: Defining Matters’
This paper builds upon the understanding of infrastructure developed in “Infrastructure:Defining Matters.” Through a primarily case study approach it explores in-depth a particular method of deciding upon infrastructure investments and identifies ways that decision-making can be strengthened drawing upon that understanding and a revised version of the linked categories for analysis based on them, which were described in the previous publication.
This paper has three main parts. First, we briefly explore arguments grounded in fiduciary duty (and others within the “shadow” of law) as well as others rooted in the real-world social, political, and other environment in which pension funds may operate which might justify why they might make or recognize such commitments.
Second, we explore in great depth how pension funds might proceed in those terms. We discuss the standards, criteria, etc. of which pension funds might take to take account or apply. But we suggest that the major challenge relates to the systems, processes, capacities, resources, etc. which they have in place to ensure fulfillment of that commitment. In turn we describe and analyze the extensive experience in these terms of other major financial institutions, namely, international development finance institutions (DFIs), for example, the International Finance Corporation (IFC), and somewhat similar national ones well that of the financial institution signatories (EPFIs) to what are termed the so-called Equator Principles (EP).
We then canvas important “cross-cutting issues”, ones which play out among many investors, for example, the matter of the relationship between how environmental and social considerations are addressed in investments and the financial performance of those investments. We also take a close look at practice relating to implementation of one aspect of standards involving social considerations, namely, labor-related standards. In addition, we draw on the relatively greater transparency of a large Dutch pension fund to offer some insights into how it goes about translating its commitments into action.
The last part of the essays distills from the preceding ones a series of “lessons learned.” That is, it offers recommendations as to what pension funds might need or want to think and then, what they might need or want to do should they choose to adopt standards relating to environmental and social considerations and, in turn, pursue a serious-minded effort to assure that those standards are met.
In this chapter we will contend the following: the trust model is a poor fit for the relationships in which plans are embedded. Those relationships warrant, at minimum, decision-makers considering members’ interests as workers at the associated enterprise, which derive from the financial risks of plan investments in other enterprises in general, and arguably the impact of harms that result from the behaviors of specific, sometimes competing enterprises. We express skepticism that these relationships justify taking account of members’ interests other than as members or workers. However it can be justified based on a different line of argument. It concerns the extent to which members (or others) who participate in collective vehicles for investment should retain the voice they would otherwise have with respect to advancement of their interests in the case of their own individual investment decisions. Vindication of a broader range of members’ interests might have merit as a matter of social policy rather than as one of advancing those interests for their own sake.
The foregoing points are made within the context of what is deemed to be decision-makers’ duty
of loyalty. However, we briefly explore the import of what is termed their “duty of care” for the issues explored. In doing so, we assert that the statutory framework that defined that duty was largely devoid of substantive content. The content was supplied by investment theories and practices at best insensitive to the relationships in which plans are grounded. Moreover, those theories and practices embodied problematic claims about the goals that might legitimately be pursued by the enterprises in which plans might invest. These claims stand in tension if not in direct conflict with those of members’ interests that decision-makers might appropriately seek to advance. The foregoing suggests a close or intimate connection between how fiduciary duty, with respect to investment in enterprises, and the legitimate goals that might be pursued by those enterprises are understood.
Recently, Brazil made changes to its retirement system as it concerned public sector workers, changes which in certain ways were similar to those which occurred for most federal workers in the United States somewhat over a quarter of a century ago. Broadly speaking it involved the conversion of a purely pay-as-you-go defined benefit plans to a hybrid of a reduced pay-as-you- go defined benefit plan with a funded defined contribution plan. In the United States, the latter is called the Thrift Savings Plan which now has over 4.5 million participants and nearly $400 billion in assets.
This paper offers a brief history of the origins of the U.S. system up until the changes in question were made, what were among the major factors or considerations which appear to have spurred the changes, a little bit about the constituencies which seem to have driven or resisted change as the case may be, the modifications that were envisioned, and expectations as to the difference that was expected to be wrought from those alterations. It canvases the differences between the then “old” and the “new” systems in relation to what was ostensibly sought to be achieved. It then draws on what is a surprisingly thin literature to describe the outcomes of the changes more than 25 years later with an eye to hoped-for or anticipated results at the outset. We then detail important elements of the new Brazilian system – which is at an early stage – with an eye to similarities and differences between it and the one we have described with a focus on how the outcomes of the system in the U.S. might bear on thinking in Brazil as it moves forward with its own. We conclude briefly with thoughts on the nature and merits of further pursuing the comparison and inquiry.
The focus of the paper is on retirement plans whose members derive financial claims directly or indirectly from financial investments made by them or by others on their behalf (as contrasted with what are termed “pay-as-you-go” plans). Central to the efficacy of funded plans are the roles and responsibilities of those with ultimate authority to make the required investment- related decisions and effective fulfillment of them by those to whom we refer to as “investment decision-makers”.) Although the matter of efficacy quite obviously is rooted in concern for sought-for outcomes for individual plan members there are also significant implications for the larger economy and society. Discussion with respect to those roles and responsibilities often falls in whole or part under the rubric of what is termed “fiduciary duty”; however, there are other important and related roles and responsibilities which occasion the choice of title for the paper.
More particularly, it considers key issues encompassed by discourse in India and the United States pertaining to fiduciary duty as they concern investment decision makers. In part the premise is that there can be much that each country can learn from the other in view of their different experiences in that regard. In part it is also in recognition of the fact that retirement plans in each country have made or may make investments in the other and that insofar as such investments might be mutually desirable having a sufficient understanding of how fiduciary duty shapes the expectations and channels the needs of plan members is critical to achievement of that shared goal.
In our view the available literature in these terms has been modest indeed so in a number of respects it has been unchartered territory. Moreover, the retirement systems in both countries are composed of a range of rather different kinds of plans, many of which have a rich and varied history and diverse associated institutions, policies, and practices the attributes of which are not immediately or readily made transparent or accessible, especially to those in another country.
With that in mind, this paper sets the stage for and makes an initial foray into debate in both countries in relevant terms, identifying key concepts and modes of thinking and implementation. We strive to flesh out the foregoing by an in-depth illustrative discussion of the issues as they relate to one important kind of plan within the retirement system of each country. We do so with any eye to structuring the analysis to establish the basis for an inquiry in a subsequent essay with not only potentially greater depth but also a broader reach in terms of the types of plans canvassed. In the concluding section of this paper we offer what might be termed observations but which may also be viewed as recommendations for others concerned with these issues, especially those with authority as to what fiduciary duty should entail. That being said we do so recognizing that given the distinctive experience of each country those observations (or recommendations) may have greater or less import or play out in a different way.
Much attention has been given by pension funds and other institutional investors to governance and in some measure environmental considerations in their investment-related decisions, spurred by either by normative concerns and/or their impact on financial performance. However, very little has been done in the latter terms with respect to what are often termed social considerations, which include work-related matters. This publication represents an effort to begin to remedy that problem.
More particularly, of the many published studies of human capital policies, the paper examines 92 that focus on the links to corporate financial performance. A large majority of the studies – covering a period of two decades and encompassing dozens of countries and industries - reported positive correlations. The paper summarizes key aspects of the research, reviews the methods and approaches they employ, and discusses strengths of and limitations to the findings. Overall, the paper suggests that human capital management can be material to a company’s financial performance. It recommends the kinds of information which investors should seek – among them, about the array of a company’s human capital policies, their relationship to one another, and their link to the company’s business strategy, and measures outcomes and financial impacts – and companies should provide.
Households in the United States face serious challenges to enjoying income security in retirement. This paper critically appraises two policy initiatives ostensibly geared to helping to meet those challenges. One already embodied in law - the federal Pension Protection Act of 2006 (the "Act") - and the other in the form of Obama administration and legislative proposals, use automatic enrollment in employment-based defined contribution (DC) plans and Individual Retirement Accounts, respectively, along with default investments as means toward that end.
The paper describes the rationales offered at the time for the Act's provisions, the manner in which the enacted policies have been implemented, and how effective they have been and are likely to be. It assesses the strength of the evidence available at the time to support advocates' contentions that automatic enrollment would be a success. It then considers the post-enactment literature on the outcomes of automatic enrollment. It follows with a review of the literature on persistence (over time) of contributions to defined contribution (DC) plans and how realistic or justifiable were expectations for the success of the Act's provisions. The paper then characterizes the IRA proposals and examines studies of the persistence of contributions to IRAs. Next it evaluates the workings and outcomes of New Zealand's KiwiSaver scheme, the one already in operation which most closely resembles what proponents urge should be done with respect to IRAs. Finally, drawing on the findings and observations in the preceding sections, the paper offers a broader perspective on the directions policy should take if there is to be a serious prospect of ensuring retirement income security for all households in this country.