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Should public pension plan assets be managed for pensioners, or taxpayers?

September 20, 2018

Paul Rose is a law professor at The Ohio State University. Over the weekend, he had an article published in the Illinois Law Review titled “Public Wealth Maximization.”  Rose makes a groundbreaking case for the fundamental reshaping of fiduciary duties of managers of public pension funds. Historically, they have been directed to pursue the best interests of plan beneficiaries. Rose argues that they should first and foremost be managed for the benefit of the general public – citizens and taxpayers.

As part of his argument, Rose notes that the legal position of pension plan participants behaves more like a senior claim on government, rather than the residual claim for shareholders in corporations, where managers owe a fiduciary duty to the residual claim. While it may seem that pension plan participants fare well when plan assets are invested well, and they fare poorly if plan assets are invested poorly, that just isn’t the case, especially in places like Illinois where defined pension benefits are  guaranteed under state law.

So Rose argues that fiduciary duties should flow to the real risk takers – the public.

Consider a market crash. Do pensioners care? Not if their benefits are defined and guaranteed. Citizens and taxpayers are the ones on the hook. They’ve effectively been placed in the stock market, even if they don’t want to be there – just on the downside.

In discussing the implications of his argument, Rose focuses on what they can mean for investment choices, particularly in light of externalities and issues relating to socially-responsible investing. But his argument also has important – and likely good – implications for risk-shifting to taxpayers, and could result in ‘socially responsible’ investment decisions of a different sort, including less risky investment portfolios for public pension plans.

In a world where pension benefits are defined and guaranteed, and plan managers under a duty to care first and foremost about plan participants, there can be incentives to invest in riskier-than-socially-responsible portfolios when citizens and taxpayers bear any downside of risky investments.

In turn, the idea that pension plan assets should be managed with a view to the public as the residual claim supports an argument I am developing that GASB recognized pension liabilities on balance sheets incorrectly. After decades of leaving them off the balance sheet, GASB finally required the net pension liability – the total liability less plan assets – to be included in the debts of governments. One can make a case, and I am developing it, that GASB should have forced the recognition of the total liability as a debt, along with recognizing plan assets among the assets of the sponsoring government.



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