Why politics and pension fund management don’t mix

Thomas P DiNapoli was given a little scare in the recent US mid-term elections but, in the end, was returned fairly comfortably to his position of New York State Comptroller and sole trustee of the New York State pension fund. What happens next, though, may be more interesting.

DiNapoli, a career Democrat politician, is the main auditor of State agency finances. He is also a zealot about waste and impropriety in government finances. He introduced several important reforms in the management of the $132 billion NY fund. And in his recent re-election campaign, he said he stood for “main street values” rather than “Wall Street values”.

He was up against a first-timer Republican in former Wall Street “restructuring” expert, Harry Wilson, who outspent diNapoli but seemed to lack the political nous for a successful campaign. But a few things which Wilson promised during the campaign must have resonated among members and contributing employers of the fund – America’s third largest.

Wilson promised, most importantly, to replace the Comptroller’s position as sole trustee of the fund with a properly constituted board and executive manager. It’s hard to argue with that.

He also promised to move the fund’s asset allocation down the risk spectrum with a new overweighting to fixed interest and passive strategies.

Under DiNapoli, who doesn’t pretend to have any investment management experience, the fund has adopted a standard diversified strategy including various alternatives and real assets. People in the industry would probably support the DiNapoli strategy over a new conservative one, especially at a time when the world is likely to come out of the doldrums in the not-too-distant future and most professionally managed funds are re-weighting to growth and emerging markets assets.

Wilson also said a lot of silly things, but we can probably forgive a politician that during an election campaign. He described the fund under DiNapoli, for instance, as “the largest Ponzi scheme in New York history”.

The challenge for DiNapoli, having been returned to office, is to take on board some of the positive elements which came out of the campaign. Not many politicians are big enough to do that, but DiNapoli can rightly point to a record of overseeing greater transparency and reduced opportunity for corruption at the fund. He also defended his staff’s investment decisions, such as the alternatives exposures, in the face of criticism from a largely uninformed public.

The point is, though, that the management of people’s retirement incomes should not be left in the hands of politicians, no matter how enlightened and well-meaning they are.

While the New York fund is an extreme example, many if not all public sector pension funds and sovereign wealth funds are subject to some sort of political influence. The two largest funds in the US, CalPERS and CalSTRS, have their occasional board spasms which get in the way of professional management. And a lot of public funds have legislated restrictions on investment strategy such as limiting offshore exposures.

Governments can argue that, as plan sponsors, they have the right to impose their will. But unlike corporate sponsors, the governments’ “shareholders” represent the whole of their particular society. By interfering they are doing a disservice to both their constituents and the government employees they are supposedly protecting.