Thursday, February 10, 2005

Privatizing state pensions -- good for whom?

The debate over "privatizing" the California state pension funds raises some different issues than the national Social Security debate. In the wake of the Enron collapse, in which CalPERS suffered significant losses, the pension board has taken on a leading role in pushing for corporate governance reform. At approximately $180B in assets, the California Public Employees Retirement System (CalPERS) is the largest pension fund in the country. Unlike individual small shareholders, CalPERS can throw some weight around in the companies it invests in. It has used this influence to push the adoption of conflict-of-interest reforms, and has opposed over 2000 director candidates in corporate elections that have historically been little more than a rubber-stamp formality. It lead the calls for the resignation of the grossly overcompensated Richard Grasso, chairman of the New York Stock Exchange. Much of the positive reform in corporate governance has come as a result of the activism of CalPERS and other large pensions around the country. Without such aggregated shareholder power as these pensions can wield, there is little to stand in the way of corporate abuse. Though some have argued that this activism conflicts with CalPERS fiduciary duty to its pension investment, board activists rightly point out that improving corporate governance is in the best long-term interest of corporate investors. They are in fact aligned on their fiduciary duty to manage their pension.

Thus it is that some see Governor Schwarzenegger's drive to "privatize" CalPERS as really being an attempt to undercut this corporate activism. If the large pensions are transformed into individual 401K-style retirement accounts, the leverage over corporate accountability will be lost. Some, such as the California Chamber of Commerce, believe that would be a good thing. Others, such as State Treasurer Phil Angelides (one of "activist" board members of CalPERS), believe the Governor is being motivated by Washington Republicans and corporate interests. Such suspicions had been raised over a year ago when one of the leading CalPERS activists was ousted. Mr. Angelides is busy networking with other activist state pensions around the nation to counteract the "privatization" movement. Meanwhile, the San Jose Mercury News questions the Treasurer's reading of the Governor's motives. They point out that Governor Schwarzenegger has proven to be quite independent-minded (his proposals for sane redistricting are none too popular with the RNC). I certainly give our governor credit for his independence, but I think it would be a mistake to unduly dismantle our state pensions. Without their influence, individual 401K-style accounts would suffer lesser returns in the long run, with few remaining checks and balances on corporate malfeasance. They are doing a great service not only for their own pension-holders, but for all stock-holders.

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