Research Report: Pension Bailouts Lead to Risky Behavior

The federal bailout of multiemployer pensions plans under the American Rescue Plan Act of 2021 has increased their incentives to take greater risks, according to a research paper published by the University at Buffalo School of Management.

The research compared investment allocations and pension administration of multiemployer pension plans with those of collectively bargained single-employer pension plans, which do not receive bailout funding.

The paper examined how multiemployer plans responded to cash bailouts after the American Rescue Plan was signed into law in 2021. It found that the plans’ managers are increasing administrative fees, future benefit payments to participants and investment allocations to riskier assets, compared with single-employer pension plans.

During fiscal 2023, the Pension Benefit Guaranty Corporation, which oversees the ARP’s Special Financial Assistance Program, provided approximately $45.6 billion to multiemployer plans through the Special Financial Assistance Program, tacking on an additional $176 million in “traditional financial assistance” to 100 multiemployer plans.

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“We find that the pension bailout increased plans’ incentives to engage in risk-taking, opportunistic and self-serving behaviors,” Michael Dambra, associate professor of accounting and law at the University at Buffalo School of Management, said in a release. “It shifts the consequences of increased risk-taking away from the companies sponsoring these underfunded pension plans and onto taxpayers.”

Collaborating with Dambra on the study were Phillip Quinn, an associate professor of accounting at the University of Washington’s Foster School of Business, and John Wertz, assistant professor of accounting at Indiana University’s Kelley School of Business.

“Our results indicate that the ARP resulted in multiple outcomes consistent with increased moral hazard,” the paper stated, adding that multiemployer plans have increased their exposure to riskier assets such as stock, registered investment funds and private equity by $32.5 billion since the ARP was passed, while decreasing their holdings in cash, government debt and corporate debt.

The paper suggests that cash bailouts temporarily relieve underfunding issues for affected plans but are not likely to solve the structural underfunding issues in both private and public sector pension plans, and they may even worsen the issue over time.

“Although government bailouts can serve as a proper response to a systemic crisis, such interventions can distort optimal resource allocation and exacerbate moral hazard issues,” according to the paper.

The PBGC’s Multiemployer Insurance Program, which covers approximately 11 million participants in 1,360 insured plans, had assets of $4 billion and liabilities of $2.5 billion as of September 30, according to its fiscal 2023 annual report. According to the PBGC, the net financial position of the Multiemployer Insurance Program improved during the fiscal year to a positive net position of $1.5 billion, up from $1.1 billion in fiscal 2022.

Meanwhile, the PBGC’s Single-Employer Program, which covers nearly 21 million workers and retirees in approximately 23,500 insured pension plans, had $130.9 billion in assets and $86.3 billion in liabilities as of September 30. That resulted in a positive net position of $44.6 billion, up from $36.6 billion one year earlier.

Despite the researchers’ warnings of increased risks as a result of the ARP, the PBGC’s estimates from its “Fiscal Year 2022 Projections Report” indicated its Multiemployer Insurance Program is likely to remain solvent for more than 40 years, which it attributes primarily to the enactment of the ARP’s Special Financial Assistance Program.

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Tags: American Rescue Plan Act, John Wertz, Michael Dambra, Multiemployer Pension Plans, PBGC, Pension Benefit Guaranty Corporation, Phillip Quinn, Special Financial Assistance Program, University at Buffalo School of Management

American public pension funds and university endowments continue to invest billions in China, according to a report from Future Union, an advocacy organization. The “Rubicon Report” criticizes institutional investors and funds for financing what the organization calls adversarial states.

According to data collected by Future Union, public pension funds in 43 U.S. states currently hold investments in China and Hong Kong, according to private and public databases as of June 30. Of the 74 largest pension funds, 29 have made investments in the past 12 months, while 56 of the 74 have made follow-up investments in China in the past 36 months.

In the past 36 months, U.S.-based public pension funds have invested more than $68 billion in China, according to the report. Some of the largest allocators include the California Public Employees’ Retirement System, which has made 80 investments totaling $7.86 billion; the San Francisco Employees’ Retirement System, which has invested $3.38 billion over 80 investments; the New York State Common Retirement Fund, which has invested $8.392 billion over 72 investments; and the California State Teachers’ Retirement System, which has invested $5.56 billion over 58 investments, according to the report.

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“CalPERS is a global investor and believes diversification is a key component to generating the returns needed to meet the retirement security of our 2 million members,” said a spokesperson for CalPERS, at $444 billion the country’s largest pension fund, in response to a request for comment. “We are closely monitoring discussions in Washington and elsewhere and, as always, will comply with any additional government requirements that might be initiated.”

CalSTRS, which with assets totaling approximately $317.8 billion is the second-largest pension fund in the U.S., also responded.

“As of December 31, 2022, approximately 1% of the CalSTRS Investment Portfolio was invested in Chinese public equities,” a fund representative said. “The vast majority of our Chinese holdings are in public equities, and we are in full compliance with President Biden’s executive order. Though China is part of the global market index and is the second-largest economy in the world, our exposure is modest and fell to No. 14 on our rankings of total fund exposures by parent country as of February 2023.”

CalSTRS also clarified that it intends to hire dedicated China managers to analyze environmental, social and governance risks with first-hand knowledge.

Some of the largest university endowments with investments in China include the University of Michigan, which has invested $1.57 billion across 83 investments; the Texas Permanent School Fund, with $1.97 billion invested across 9 investments; and the University of Texas System’s endowment, with $1.6 billion invested over 29 investments. None of the asset owners cited above, beyond the two California pension funds, responded to requests for comment.

Earlier this year, the board of the Federal Retirement Thrift Investment Board, the country’s largest defined contribution plan, voted to change the benchmark for its international fund to all investments in China, preventing exposure to these investments for federal employees.

Future Union, as an advocacy group focused on encouraging democratic values, criticized institutional investors for continuing to invest in an adversarial nation.

“This Rubicon Report initiative is designed with a single goal in mind: to catalyze and ensure that institutional investors, funds and leaders champion free and fair markets that uphold democratic values,” the report stated. “Given technology’s essential place in a global civilization, Future Union believes that there is a direct connection between the startup companies driving innovation and countries who prevail in the reordering of the geopolitical landscape.”

Lawmakers in multiple states have taken steps to ensure that pension funds in their states divest their investments in China. The Missouri State Employees’ Retirement System’s board recently voted to divest all of its holdings in China.

Some institutional investors have already pulled back from China, such as venture capital firm Sequoia Capital, which recently finalized its separation from its China business in December. Still, many institutional investors see strong opportunities in China, despite concerns from lawmakers and analysts.

Research Report: Pension Bailouts Lead to Risky Behavior

Despite Concern From Lawmakers, US Pensions and Endowments Pour Into China

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