It feels like America’s working class has been losing the class war for as long as we can remember. But it has one wildly powerful, often forgotten tool: trillions of dollars sitting in pension funds. Might this enormous pool of capital be labor’s greatest weapon in its fight against the power of capital itself?
The awesome political potential of this money is the topic of “The Rise of the Working-Class Shareholder,” a new book by David Webber, a law professor at Boston University. Even though organized labor has been getting its ass kicked politically for decades now, its vast pension funds can exercise an incredible amount of power—though their ability to do so is under continuous assault.
Photo by David Webber
Webber answered our questions about labor’s capital, and how it can serve all of us.
Splinter: Is it accurate to say that the pension funds of labor organizations are the single most powerful economic force aligned with the interests of the working class? Should we be encouraged or discouraged by the answer?
Webber: I think that’s probably right. There are different ways of assessing the total value of these pension funds. They run from $3-$6 trillion. One estimate by the Federal Reserve puts the number around $5.6 trillion. These funds own roughly 10-15% of the stock market, and somewhere closer to one-third to one-half of private equity. They are certainly the most powerful working class institutions that operate directly inside the markets. No other financial institutions come close either in terms of size or alignment of interests. Their power is loaded with contradictions and ironies. They’ve been described as “labor’s capital”—I think Teresa Ghilarducci first used the term—and it’s certainly odd that, of all the institutions created by labor in the 19th and 20th centuries, labor’s capital may have the best chance of surviving into the 21st.
I think the strongest power on Earth today is the capital markets. During the financial crisis ten years ago, they broke Greece, pushed Italy and Spain to the edge, forced massive bailouts. I remember watching the Republicans reject the bailouts, and then after the stock market went into free fall, they came right back to Congress and passed it. $700 billion from a Republican House of Representatives. And then the car manufacturers had to beg to for a $17 billion bailout, and their CEOs were ritually humiliated on Capitol Hill before they could get it. The power differential was striking. Given the power of markets, I think unions and workers absolutely must have capital strategies departments, staffs, employees. It’s not enough to invest in organization, elections, legislation, lawsuits. Those are important too. But often, by the time you’re in court, Congress, or the voting booth, the market has already created the facts on the ground. Labor needs a voice inside the markets themselves. Arguably, market voice counts more than any other kind.
In your book you discuss various ways in which certain pension fund investments might actually be harming the working people whose money is being managed. What are some of the most blatant or harmful such investments, that working people should look out for in their own pension funds?
I think the most harmful investments have been in privatization. In the book, I use an example of a public school custodians union whose pension fund was invested in Aramark. Then Aramark shows up in town and underbids the union for the schools contract. These workers had been making $20 an hour. They were offered their jobs back for $8.50. And this transaction had been financed with their own retirement funds. The New York Times recently did a series on private equity taking over the public square. But what is truly shocking is how much of that is actually being financed by the very workers whose jobs are being replaced. This is the main example I use in the book. I first heard about such investments at a pension trustees meeting, when some worker trustees started to complain that their funds had been forced into these privatizing investments. There were firefighter funds invested in private firefighting companies, teachers’ funds in private school servicing companies, etc.
Fortunately, the more alert funds are on top of this issue. Some have adopted policies saying that they simply do not invest in privatization schemes. Others have developed policies that minimize the effect on public workers. More recently, the New York City pension funds adopted a responsible contractor policy for infrastructure investments, meaning that they will invest in such projects if the private equity fund pays fair wages and benefits to workers. Other funds invest only on projects that hire union labor. That’s a positive deployment of worker shareholder power.
Many people argue that retirement funds should be invested in a way that earns the highest return, and no outside political concerns should be taken into consideration. What’s wrong with this argument?
Returns are certainly crucial. After all, these funds are paying out retirement benefits to workers over a thirty-to-forty year time horizon. But returns are not the only source of revenues for these retirement funds. So are contributions from employers and employees. The privatization example I just used illustrates the problem. What if you make great returns by killing your own contributors’ jobs? That can undermine the funds themselves, employee and employer contributions to them, and the workers. But there are also instances where considering labor issues is not a trade-off against returns. A well-compensated and well-trained labor force can enhance returns too.
I’ll also note that, more generally, it is not easy to sort out political from investment motives. Whenever someone wants to deride an investment, they call it political. For years, funds like New York City and others filed shareholder proposals at companies on global warming issues. Those were regularly derided as political. But last year, two of those proposals were adopted by energy companies with the backing of prominent mainstream investors like Blackrock and Vanguard. What was once viewed as political is now seen as an investment concern. And there is, of course, a tradition of making political concerns central when they are viewed as important enough, going back to the divestment movement over South African Apartheid in the 1980s.
Why are labor pension funds so uniquely positioned to promote better corporate governance policies at big companies? Why don’t all big investment firms want to promote such democratic policies?
One of the main reasons why these big public pension funds, these worker funds, have been so well-positioned to promote better corporate governance is because they lack many of the conflicts that other funds have. For better or worse, companies have often been hostile to corporate governance reforms pushed on them by “outsiders”—meaning their own shareholders. Corporate managerial culture is often: we know best how to run ourselves, thanks very much. Given the hostile posture, many funds like mutual funds prefer to stay quiet about these issues, to operate behind the scenes if, at all, or at most to support initiatives brought by others. Remember, mutual funds make a lot of money from managing the 401(k) plans of big companies. They don’t want to undermine their own business prospects by aggressively challenging the CEO’s pay, for example. There are also social network effects that can hinder mutual fund activism. Mutual fund managers travel in the same social circles and attend the same business schools as corporate managers. That’s not true of the teachers or other public employees on pension fund boards... Maybe the most blatant example of the difference between worker funds and everyone else is in litigation. Roughly 40% of securities fraud class actions and deal class actions are brought by public pension funds and labor union funds. Other investors tend not to take action in the face of fraud, in part for the reasons just described.
Finally, I think that there is a public-spirited ethos to these pension funds that leads them towards activism. In the book, I mention a sheriff-trustee of a police and fire pension fund who explained why his fund brought securities fraud lawsuits: “Half my guys carry axes and the other half carry guns. We’re not about to sit back and let ourselves get ripped off and not do anything about it.” There’s an element of social responsibility to that attitude.
Political critics of our pension system say that it is an unsustainable financial drain on cities and states, and that we should move from “defined benefit” pensions towards a system of private, individual retirement accounts. What do you make of this argument, and the motivations behind it?
Much of the debate over the sustainability of defined benefit pension funds turns on a known unknown: the future performance of markets. If markets perform over the next thirty years the way they have performed in the last eighty, then we’re fine. If they substantially underperform, there will be serious issues. Most of the debate right now is over how to account for that risk of underperformance. A substantial segment of the right wing position on pensions is that we must assume the worst case scenario. Other voices suggest that it is illogical to assume the worst case scenario, and that relying on assumptions that are slightly more conservative than actual market performance over the past several decades is sufficient. Ideology and self-interest are everywhere in this debate. I do worry greatly that some of the right-wing critique stems from a desire to undercut the public sector, renege on pension promises, keep wages and compensation low, and avoid any increase in taxes—particularly on the wealthy—that might be required to pay for the services that we have already consumed, that we have already received from these public workers, whether they be teachers, firefighters, sanitation workers, etc. The way that some jurisdictions in this country promised to pay pensions, pensions that are not particularly generous, and then reneged on those commitments is simply outrageous.
All that said, my main concern about pension reform is on the effect it would have on these funds as investors. The number one solution advocated by pension reformers is to break up these big collectively managed defined benefit pensions into millions of individually managed 401(k) accounts or the like. That’s perverse. First, there is a lot of evidence that these funds leave retirement savers with insufficient assets, and that they are loaded up with high fees that most of us have no prayer of understanding. In other writing I compare having a pension to being in a union, and having a 401(k) to being in a right to work state. We 401k investors are isolated, atomized, with little leverage vis-à-vis companies, and our investment managers. We actually benefit from these large defined benefit funds being in the market, engaging in shareholder activism on behalf of all of us. We will all be harmed if these funds are broken up into individually managed accounts like the rest of us, even if we are not actually participants in those funds. Their work benefits us all. Breaking them up is one of the main objectives of pension reform. I call it “economic voter suppression.” Pension funds have voice in the markets, but if they are converted to individually managed accounts, they will lose that voice. They will be silenced, just like the rest of us. I think the collective voice of these institutions should be preserved, and that can be done, crisis or no crisis.
What do you see as the ideal retirement system in America? In the long run, wouldn’t a well-financed, government-run retirement plan make the most sense for everyone?
That could yield a very long answer. I’ll give you my bottom line: whatever we end up with should be in the form of pooled, collectively-managed funds. Only through such structures can those of us who contribute to these funds retain our shareholder power. Solutions that involve breaking us all up into millions of individually-managed accounts would squander our collective shareholder power, leaving us without any voice, making us all more vulnerable.
How well do you think organized labor is harnessing the financial power of its pensions to promote the broader political goal of helping working class interests? What more could be done?
There’s a broad range on performance. Some get an A and some get an F. Some of these funds are really asleep at the wheel. I cannot believe that there are still pension funds out there making investments in hedge funds given hedge fund under-performance, particularly if they are still charging the traditional 2% and 20%. (Two percent off the top and 20% of profits). Some pensions are not focusing on the fees that they are paying. But overall, I think that there is a broad awakening going on across the board. Frankly, we tend to see it more in the blue state funds. Most of the corporate governance revolution of the past decade has been pushed by these funds. They have promoted proxy access, instituted responsible contractor policies, pushed back on fees. The Capital Strategies program for the North America’s Building Trades Union recently negotiated a responsible contractor policy with Blackstone for its infrastructure projects. There are good funds out there leading the way using pension power for good, for their contributors, and for the rest of us. I hope their tactics will be more widely emulated in the coming years.