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Monday, August 26, 2013

Is the UC Pension Fund Other People’s Money?

The LA Times today is running a story about a group that wants the UC Regents to divest their funds from “fossil fuels.”  [If you listen to the recordings of past Regents meetings on this blog, you can hear the group's representatives speak at recent public comment sessions.]  We have a student regent-elect who has pushed in the past to divest from Israel.  When a school shooting incident occurred in Connecticut not so long ago, UC divested from gun companies.  Court decisions regarding public disclosure of info from UC investments in private equity funds have made it difficult for UC to invest in such funds.  [No such disclosure constraints are imposed on private universities.]  On a somewhat related issue, Calpensions.com is running a story about CalPERS which includes some info on an initiative passed in 1992: “But investments made for social goals can conflict with the CalPERS duty to give member benefits top priority. Proposition 162 in 1992 also gave CalPERS sole control of its funds, a safeguard against legislative raids or meddling.”  

There is a cautionary note here which can be summed up in a number: 7.5%.  That is the rate of return currently assumed over the long-term for annualized earnings in the UC pension fund.  If the fund turns out to earn less than that – and there is no guarantee that it will earn 7.5%/annum over the long term - the unfunded liability will in fact be higher than currently estimated and ultimately there will be a tapping of the UC budget in some way to pay for it.  There is also a simple fact.  While there is no guarantee UC will be able to earn 7.5%, there is no way it will earn 7.5% in a normal economy with a normal inflation rate (if we ever get back to that) by investing only in U.S. Treasury securities.  That is, there is a virtual guarantee we won’t get the needed 7.5% without holding stocks over the long run.  The current yield on a conventional 30-year Treasury bond is below 4%.  [And maybe some folks would object even to holding Treasuries because of this or that federal policy.]  

The most general rule of finance is to have a broad portfolio which includes many different assets.  Yes, you can always find some period in which some stock or set of stocks – which represent a practice or activity you don’t like – earned less than some other.  But any broad portfolio is going to include some stocks of some firms somebody doesn’t like because of something those firms do. 
As has been pointed out many times in this blog, the UC pension fund is not an old folks’ issue.  Retirees will get their pensions regardless of how pension investment is managed.  If you are a young faculty member or other UC employee and plan to stay at UC for a long career, however, the pension fund is not “other people’s money” that can be redirected away from something somebody doesn’t like without cost to you and your colleagues or co-workers.  No, that doesn’t mean that every investment decision UC has ever made was wise.  But it does suggest that 7.5% is not just an abstract accounting figure; anything that is done by the Regents in UC investing policy has to focus on 7.5%.



There is an obvious attraction to other people’s money.  The question is whether you are the other people:
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