Stewards of some of the nation's sizeable pension funds assailed Wall Street's excessive management fees, condemned the financial sector's business model for pension fund investments, and urged greater collaboration among investors of workers' capital in job growth and community wellbeing.
The critiques occurred during an Economic Impact Investment Forum in Los Angeles on September 8, 2013, in conjunction with the AFL-CIO Convention, sponsored by Heartland Capital Strategies (HCS). This was the seventh in a series of city Heartland Forums focusing on rebuilding cities and revitalizing vital clean economy industries. Heartland is building a "Community of Practice" for revitalizing the real economy by implementing the U.N. Responsible Investment (RI) principles.
Ken Georgetti, President of the Canadian Labour Congress (CLC), assailed what he termed the "shampoo economy," in which the financial sector "shampoos, lathers and rinses," time and again repeating the excesses that led to the 2008 financial crisis (which resulted in the loss of $9 trillion in retirement assets and household wealth in the U.S.).
"The business model for institutional investment is broken," declared Allan Emkin, Managing Director of the Pension Consulting Alliance. "The reason is that it's completely driven by fees," when the challenge should be "to keep the promises to plan participants by making investments in the economy that create wealth, that create jobs and an economic future in a manner consistent with fiduciary duty."
Debunking Wall Street
"The [commonly held] notion is that Wall Street knows how to efficiently get capital to where it's needed," said Dennak Murphy, Director of Capital Stewardship for the Service Employees International Union (SEIU). "That's a lot of bunk. Trillions of dollars in fees are getting siphoned off the funds as 'economic rent' -- way beyond the value of the services being provided."
Georgetti characterized defined-benefit (DB) pension plans as "the solution to the short-term bubble economy" that the financial sector is perpetuating. "Because DB plans are long term, they're looking ahead two decades. They aren't driven by short-term market swings and are especially sensitive to the environmental, social and governance (ESG)" Principles of Responsible Investment (PRI) established by the United Nations. Georgetti also chairs the Committee on Workers' Capital (CWC) of the global labor federation and is, as such, an international leader on this topic."It's a business model that assumes that you are stupid," Emkin added. "That you will pay people fees who don't do anything for you. Fees go up with the market. If you don't challenge that [practice], you can't expect change."
"We have to sound something of an alarm bell," said Steve Coyle, CEO of the AFL CIO's Housing Investment Trust (HIT). "As a group, we have to work together better to finance infrastructure and the new economy," much as was done in 1955 when the merger of the American Federation of Labor (AFL) and the Congress of Industrial Organizations (CIO) took place.
Back then, the AFL, under the leadership of George Meany and Lane Kirkland, asserted that workers had to take control of their capital to avoid it being manipulated by the banks and the financial system. They believed that one day those assets would be the major source of capital in our economy.
Labor's vision proved prescient. In 1954, workers' deferred wages in the form of pension assets totaled $90 billion. Today, Coyle pointed out, they total $19 trillion, noting that management fees charged by the financial sector for "managing" these assets amounts to a staggering $300 billion.
Valuing Community Well-being
Under the current business model for pension investment, explained Mike Ibarra, Senior Vice President for Investor Relations at the Multi Employer Property Trust (MEPT), "there's not a lot of incentive among investment managers to take risks that could improve long-term results at the expense of immediate returns," because performance measurements "require immediate results, quarterly, annually or on a 3-year horizon.'"
"Creating long-term value for a pension fund means recognizing the obligation to achieve short-term returns commensurate with the market," said Ibarra. "But it also means investing energy and time in trying to quantify the broader value of these investments and the value they can bring to pension participants and beneficiaries, because the investments aren't made in a vacuum, they're made in communities populated by these stakeholders."
The much bigger challenge, he said, "is to balance the value of investments with the opportunity to contribute capital to regenerating economic activity in our own communities, thereby producing market returns, economic growth and job creation. With the tremendous amount of pension capital that's currently managed, the market may be ignoring an enormous economic engine that could be reinvested in our communities at this time.
"If we don't make infrastructure and other hard asset investments, it's going to be very difficult to turn this economy around. We've got to figure out a way collectively to turn that around and make the desperately-needed investments in our communit