Wokeness Comes for the Pensions | Opinion

It was only a matter of time before the diversity warriors came for the public pensions.

According to a report by Pensions and Investments, both the Minnesota State Board of Investment (MSBI) and the Teachers' Retirement System of Illinois ("Illinois Teachers") are planning to take into account the nebulous standard of "diversity," both for hiring money managers and in making investment decisions.

Unfortunately, pursuing a chimerical "diversity" will result in a bill to be picked up by the members and taxpayers—and appears to be in violation of legal fiduciary requirements.

The Minnesota statutes governing the fiduciaries of state funds and pension funds are clear about these responsibilities. Fiduciaries of state funds are to take into account "the probable safety of their capital as well as the probable income to be derived therefrom." It is true that Section 11A.04 (13) permits fiduciaries to establish the "investment management structure," but that has to be done with the performance and safety objectives in mind. And while there are provisions made for investment in Northern Ireland, Iran and Sudan, those are each a result of specific legislative action, not state fiduciaries imposing their own political agenda on investments or hiring.

The additional statutes governing pension fiduciaries are equally restrictive. They include the taxpayers and the state of Minnesota as entities to whom the fiduciaries have responsibilities, and are no broader in the interpretation of what those duties mean. The statute dealing with investment diversification states that "plan assets must be diversified to minimize the risk of substantial investment losses." The fiduciary responsibilities for Illinois Teachers include identical language.

Affirmative action in hiring or investment is only defensible if it can be shown that it either increases returns more than it increases risk, or that it reduces risk more than it reduces returns—in which case, the argument does not center around increasing diversity and inclusion for its own sake, but rather around increasing return and decreasing risk. Which is where the argument should have been in the first place.

Wall Street during coronavirus
Wall Street during coronavirus JOHANNES EISELE/AFP via Getty Images

It's certainly what Illinois Teachers ought to be worried about. From mid-2008 through mid-2019, even as the broad stock indices were rising, the plan's funding level dropped from a dangerous 63 percent to a flashing-red critical 40 percent. The last thing the managers and board at Illinois Teachers need is a social justice distraction.

Minnesota's plans have been much better-managed than Illinois', with lower expected returns and more responsible contribution levels from state governments. However, even with a high collective funding ratio of 85 percent, Minnesota's plans should bear in mind just how quickly that can slip away, especially in bad times.

Since there is no way of adequately measuring diversity, it is almost impossible to prove that a more "diverse" set of managers or investments will produce better returns for the fund.

Fortunately, returns are measurable. If there is no evidence that minority fund managers on the whole do better, there is also absolutely no reason to think they do worse. If a Black or Hispanic money manager is better, then hire him. If an investment firm with more women, Blacks or Hispanic analysts or managers produces excess returns, by all means, put your money there. And if there's reason to think that talent scouts are missing high-flyers, then spreading the net wider can only increase the chances of finding those managers, whatever their color.

Rest assured, this will not end with Minnesota and Illinois. Pension plans all over the country will be pushed into making diversity hires and diversity investments. Some will respond by trying to broaden their searches, other will respond by setting quotas in all but name. Little of it will benefit members or taxpayers.

There are plenty of ways to diversify investments—industry, sector, asset class. Race should not be among them.

Joshua Sharf is a senior fellow in fiscal policy at the Independence Institute in Denver, Colorado. He also serves as a State House Republican appointee on the legislature's Pension Review Subcommittee.

The views expressed in this article are the writer's own.