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By Jon Coupal
Last week, this column addressed the dilemma facing the California Public Employees’ Retirement System (CalPERS) and the California California State Teachers Retirement System (CalSTRS), California’s biggest public pension retirement funds, involving “Environmental, Social, and Governance” principles.
Depending on how it is interpreted, “ESG investing” can simply mean evaluating investments in a broad manner “to assess potential risks.”
Where ESG principles get problematic is when they are used to push a progressive political agenda at the expense of maximizing returns. This occurs when activists seek prohibitions against investing in fossil fuels, firearms, or in companies located in nations that have met with their disfavor for political or policy reasons, irrespective of the positive performance of the companies.
For current retirees and employees, there is little opportunity to influence the investment decisions of CalPERS and STRS. Some of the board members are elected by participants in the system but most are subject to the political pressures of the day.
What politicians in California and elsewhere ignore is a simple way to avoid the entire ESG quagmire as well as many other problems inherent in California’s “defined benefit” retirement plans. That is to begin shifting to “defined contribution” plans that reduce the risks to the state and taxpayers and which frequently produce better returns for the employees. In defined contribution plans, the employee’s benefit is equal to his or her own contributions, plus those of the employer, plus whatever earnings the investments accrue.
Defined contribution plans come in many flavors, but they have one common element important to taxpayers. That is, the financial obligation of the employer (paid for with taxpayer dollars) is complete at the end of each pay period.
To read the entire column, please click here.
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