Officials Are Calling for Teacher Pension Funds to Divest from Russia to Protest War in Ukraine. It Might Not Be So Easy
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Less than two weeks into the conflict between Russia and Ukraine, the repercussions are extending beyond the geopolitical sphere. Even active and retired teachers are feeling the impact through their pension funds.
Several public employee pension funds, including those that cover teachers, have significant exposure to the Russian financial market. This market has suffered greatly due to Western sanctions in response to the Russian invasion. For example, Colorado’s state pension fund swiftly removed over $7 million held in Sberbank, a Russian bank largely owned by the state. In response to these events, legislators in Massachusetts, Illinois, and New Jersey have proposed bills urging state treasurers to sell off Russian assets. In addition, governors and officials in Virginia, Ohio, Maryland, Washington State, California, Pennsylvania, and Connecticut are considering full divestment or portfolio reviews. Pension funds in Canada and Sweden are also following suit.
In a letter to California’s three largest retirement systems, Governor Gavin Newsom stated that their fiduciary responsibilities to beneficiaries require them to address Russia’s aggression and restrict Russian access to California’s capital and investments.
While this movement has been presented as a response to military aggression, removing public funds from foreign entities like Russia may pose additional challenges to the already strained retirement systems in the short term. With the significant decline in value of the Russian ruble, states must decide whether to sell their assets at significant losses. Furthermore, the current restrictions on trading Russian stocks prevent some investors from taking any action. Additionally, there are logistical challenges involved in identifying and severing ties with foreign investments in the first place.
Chad Aldeman, the policy director at Georgetown University’s Edunomics Lab, points out that teachers may be unaware that their retirement contributions are invested in assets overseas.
This situation highlights a recent development in American finance. Major American investors, including pension funds, 401(k) plans, and endowments, have increasingly favored passive funds that track stock indexes. This shift is in response to high fees and disappointing performance associated with active investments in the past. For example, the Alabama retirement system lost $221 million in a failed chain of movie theaters. On the other hand, Nevada’s public employee pension fund became fully passive a few years ago, with only one person managing the investments with a strategy of doing as little as possible.
However, Aldeman notes that many public pensions still have substantial investments in active funds, including those in foreign markets. They are striving to meet investment targets by seeking the best possible investments available.
Moving away from this approach, even as a response to global condemnation of Russia’s actions, may come at a cost. The Kentucky Teachers’ Retirement Fund, for instance, sold its shares in Sberbank in February 2021 for $12.4 million, which was over $3 million less than their purchase price in 2017.
Ukrainian-born students residing in the United States are facing difficulties concentrating on their studies due to the ongoing war back home. The situation is further complicated by the financial implications of pension funds investing in Russian holdings.
A renowned pension investigator, Edward Siedle, highlighted that although the loss of funds for a $100 billion pension fund may not seem significant, the individuals who depend on these funds see it differently. Teachers, in particular, expressed their frustration as the money lost could have been used for their cost-of-living adjustments. In some cases, the Russian holdings may even constitute a substantial portion of certain pensions.
One of the main issues, according to Siedle, is the lack of financial expertise among the boards of pension plans. These boards typically comprise individuals such as municipal leaders and retired public employees who may not possess significant knowledge in finance. Moreover, these pension plans are not regulated by the Employee Retirement Income Security Act of 1974, which is the primary federal body overseeing private pensions. Consequently, Wall Street intermediaries, including hedge funds, view these systems as being "the least knowledgeable investors."
While divesting from Russian industry has become a growing trend, teachers’ pension funds may find it challenging to distance themselves from these investments. Canceling their investments prematurely may result in "lock up fees" imposed by the fund managers, which would further exacerbate their financial losses due to the declining market value of the assets being sold.
Moreover, Siedle argues that pension funds may struggle to identify where their money is being invested due to lower transparency requirements compared to those governed by the Employee Retirement Income Security Act. This means that not only are teachers unaware of the extent of their exposure to the Russian economy, but even the pension systems themselves are in the dark.
The lack of accountability is a pressing concern. It is unlikely that the money managers would honestly disclose the investments to the pension fund, and even if they did, the pension fund would have to be transparent with the public, which is highly improbable.
In summary, Ukrainian-born students in the U.S. are finding it challenging to focus on their studies amid the ongoing war in their home country. Additionally, teachers’ pension funds are facing financial implications from investing in Russian holdings. The lack of financial expertise among the pension plan boards and the absence of regulations governing these plans contribute to these issues. Divesting from Russian industry is not easy for these pension funds, and identifying where their money is invested poses further challenges. The overall lack of accountability exacerbates the problem, as the chances of full transparency are minimal.