By Danilo Risteski

As some of the largest institutional investors in the United States, public pension funds wield considerable power over investment decisions. A recent trend highlights this extraordinary power: state pension funds have started exploiting their retirees’ pensions to force investment companies to invest in accordance with their respective states’ political priorities. Nowhere is this trend more obvious than in the environmental, social, and governance field. On one hand, states like Maine have passed legislation prohibiting public pension funds from investing in fossil fuels companies. On the other hand, states like Texas have passed laws prohibiting state entities from doing business with companies that oppose the fossil fuel and gun manufacturing industries. Investment companies operating across state lines are therefore caught between a rock and a hard place: continue investing in fossil fuels and risk antagonizing liberal states like Maine or divest from fossil fuels and lose business from conservative states like Texas. Pension funds can exploit public retirees’ funds for political ends because of a subtle fiduciary orientation surrounding public pension funds. Whereas private pension funds are governed by uniform federal laws that center fiduciary duties around pension plan participants and beneficiaries, public pension funds are governed by a patchwork of state laws that center fiduciary duties around the funds themselves. Thus, states are free to tailor their own pension fund investment rules as they see fit, sometimes at the expense of retirees. The result is an assortment of fifty different legal systems, piled on top of the recent trend toward politicizing investment decisions. Often, as the cases of Texas and Maine show, investment companies will find themselves unable to simultaneously comply with the various public pension fund requirements from state to state. Moreover, because state treasurers exercise almost unbridled discretion over investment allocations, they can all but freely abuse pensions funds in pursuit of political ends. With trillions of dollars under management, retirees stand to lose the most. This Note argues that public pension investment laws need urgent reform and standardization to prevent sacrificing retirees’ financial security in service of political priorities. To do so, state legislatures should pass laws modeled after the Employee Retirement Income Security Act of 1974, which governs private pension plans. Such standardization will ease the burden of compliance for investment companies and investment advisers while simultaneously forcing pension fund managers to prioritize retirees’ pecuniary gains.

Source University of Colorado Law Review