By John Rekenthaler

My headline poses what seems to be a rhetorical query. Should pension funds risk other people’s money by buying volatile, poorly regulated assets? Obviously not. We therefore know how this column will proceed. Having erected this straw man, the author will triumphantly torch it in a blaze of self-righteousness.

Such was my initial plan, after reading about pension funds with cryptocurrency-related losses. Houston Firefighters Relief and Retirement Fund invested $25 million in Bitcoin and Ethereum. The State of Wisconsin Investment Board placed about $20 million in cryptocurrency service providers. Worst of all, Quebec’s largest pension manager, CDPQ, wrote off almost its entire $150 million (£127 million) stake in a cryptocurrency lending firm Celsius Network, which went bankrupt.

But upon reflection, the topic deserves a fuller hearing. Through the decades, observers have chastised professional managers when they have invested outside the mainstream. They did when pension funds first bought leveraged buyout funds, venture capital funds, and small company stocks. Each time, the critics were wrong, as those securities have since become core holdings for pension funds. Might opposing the expansion into cryptocurrencies be a similar mistake?

Legal Matters

Pension funds are governed by the Employment Retirement Income Security Act (ERISA), under which, such funds can be held liable if they invest incorrectly. Specifically, the statute requires that investment professionals:

1) Exercise their duties solely on behalf of their participants and their beneficiaries.

2) Manage the portfolio with “the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise with a like character and with like aims.” (Only lawyers write that way.)

3) Diversify the portfolio, to minimise the risk of large losses.

4) Follow the rules laid out in the plan documents.

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