Public Pension Plan Investment

Description and History

A pension plan (also known as a defined benefit, or DB, pension plan) is a type of retirement plan in which a worker contributes a portion of their paycheck toward their retirement alongside their employer. That money is then invested in public equities, fixed income, real estate, and/or cash (NASRA 2024). When that employee retires, their pension plan grants them access to a defined monthly income benefit for the rest of their life. 

Pension plans have been around for over 150 years (Clark et al 2003) with the first ever public pension plan created in 1857 for New York City police officers followed by the first private plan for American Express employees in 1875 (NPPC 2017). While private pension plans have dwindled over the years, public plans remain strong, with nearly six trillion dollars in assets (NASRA 2024) supporting 34 million public servants from active employees to current retirees (Urban Institute 2022).  

Public Pension Plans, Locally Rooted Finance, and the Community Wealth Building Wedge 

While public pension plans are both governed and administered by state and local governments, they are still subject to the 1974 Employee Retirement Income Security Act, or ERISA (NCPERS 2008). Under ERISA’s “prudent investor rule”, all investments must be diversified and generate maximum financial returns (SELC 2020). As a result, over the past few decades, public pension plans have increased their holdings in corporate equities and other alternative investments (e.g. private equity, hedge funds) that do generate higher returns (Trujillo 2023), but are also much riskier (Urban Institute 2022). In fact, from 1993 to 2022, investment earnings accounted for over half of public pensions’ revenue (NASRA 2024). 

But, according to some, these risky investments over several decades have left a $5.1 trillion hole in these plans, or “unfunded pension liabilities…the gap between promised benefits and the assets set aside to pay for them” (Simmons 2024). Not only is this distressing news for millions of workers who count on their pensions for financial security into their elderhood, but also for the local economies in which they reside—as investment dollars are vacuumed up by global finance—and will retire. 

Some communities have considered public pension plan investment/divestment as a part of their strategy to revitalize local economies. From economically targeted investments, or ETIs (Cross 1993), to moving public pension dollars into ESG funds (Yousofi & Connolly 2024) to leveraging pension divestment as a vehicle for anti-war activism and climate action (Farmer 2022), cities around the United States are leveraging public pension plans to build out a robust ecosystem of social infrastructure that, ideally, precludes the need for a sizable nest egg and builds community wealth now, not decades into the future. 

Examples

Example #1: Invest (Fresno County Employees’ Retirement Association)

Public pension funds can be used to invest in local economic development initiatives. In Fresno, California, the Fresno County Employees’ Retirement Association (FCERA) collaborated with the Access Capital Community Investment team at RBC Global Asset Management and local banks, credit unions, community development lenders, and housing agencies to finance loans for prospective homeowners. In just one year, the fund invested $41.5 million in 177 mortgage loans to first-time homeowners and supported 300 units of affordable rentals. Not only did these government-guaranteed lending investments secure housing for minoritized groups, they also resulted in a cumulative eight percent annual rate of return for pensioners (Abello 2020)! 

Example #2: Divest (New York City’s Employees’ Retirement System)

Divestment campaigns have been critical to social movement organizing for decades and, in recent years, communities have been urging their local governments to participate via public pension plan divestment. Drawing on the successful history of public pension divestment from apartheid South Africa (Davidson & Eide 2023), some of the largest public pension funds in the United States have begun to move their money out industries like oil and gas as well as private prisons. 

In 2017, New York City’s Employees’ Retirement System (NYCERS)—the fifth largest in the US—divested $48 million in shares from private prison companies (Abello 2017). Last year, the funds adopted a plan to entirely phase out fossil fuel investments by 2040 (Office of the New York City Comptroller 2023). 

Of course the socioeconomic and environmental benefits of these changes are of paramount importance, but the financial benefits are not negligible. In one report from the University of Waterloo, scholars argued that the six major public pension funds in the United States “would be $21 billion richer had they divested from fossil fuels a decade ago” (Zonta et al. 2023). 

Challenges & Limitations

While both investment and divestment opportunities are available, fiduciaries of public pension funds are often held hostage by ERISA’s prudence rule. Some states, for example, prohibit investments made with a social impact lens because they believe it prevents trustees and administrators of funds from maximizing financial returns (Yousofi & Connolly 2024). 

Further, because pension staff are public employees, they are often underfunded and ill-equipped to manage the administration of such complex portfolios. Not only does this lack of infrastructure risk poor performance of the fund itself, but also results in bad governance (McCann 2022).  

Taking It Forward

Ultimately, when governed and invested appropriately, public pension plans are good for local economies (Vasquez 2019). According to the National Public Pension Coalition, because public pensions are revenue-generating financial instruments, they have the potential to fund public services like education, transportation, housing, and healthcare. Further, for every $1 a retiree receives from their pension, $2.13 in economic activity is generated, translating to one trillion dollars nationally and 7.5 million jobs (2019). 

One strategy to better direct pension plan investments is “Bargaining for the Common Good”, leveraging union bargaining as an opportunity to take back control of worker capital in pension funds, as demonstrated by organizers in California, Illinois, and Minnesota (Myklebust et al 2024). 

Additional Resources