“Topics to Watch in 2021,” Shareholder Advocate Winter 2021
Pension plans, like the rest of the country, were no doubt happy to wave goodbye to 2020 in the rearview mirror. To say that it was a challenging year would be an understatement. And yet pension trustees and administrators stepped up to fulfill their retirement systems’ mission to deliver pension checks to more than 10 million retirees—including teachers, fire fighters, police officers, other public servants and their beneficiaries—who depend on the timely receipt of their benefit payments. They transitioned their teams to work remotely while processing payments and managing billions of dollars of pension fund assets in a time of tremendous turmoil in the markets. And now they’re ready to welcome 2021!
While we’re hopeful that the rollout of the vaccine will eventually ease the impacts of the COVID 19 crisis on operational and other related issues, here are some issues that the prudent fiduciary may want to watch for in the new year.
- Ethics: We saw an example of the very real impact of the application of state ethics laws in August of last year when issues stemming from the filing of state financial disclosure forms resulted in the departure of a chief investment officer at one of the country’s largest pension plans. Fast forward to January of this year, when a state treasurer and two other trustees filed a complaint with their state ethics commission alleging that the system’s executive director violated ethics laws by providing misleading or false information to the board. Fiduciaries can expect that issues related to disclosure, recusal, and conflict-of-interest law to remain in the forefront.
- SPACs: Special Purchase Acquisition Companies (SPACs) may continue to be another hot topic in 2021 after a tremendous amount of activity in 2020. As of late December, there had been 243 reported SPAC initial public offerings raising total gross proceeds of over $82 billion. The surge in popularity of the use of these “blank check companies” as a way to go public came as the method’s reputation improved, with supporters citing an ability to go public faster with greater certainty regarding the company’s valuation and equity capital raised. But improved governance practices weren’t enough to stave off lawsuits regarding SPACs that started to accumulate in 2020. And in January the Council of Institutional Investors sent comments to the SEC questioning whether a proposed loosening of SPAC listing standards was consistent with the protection of investors and the public interest. Keep an eye out for more on SPACs in 2021.
- Secure Choice: “Secure Choice Pensions” refer to public-private partnerships to provide retirement security for American workers, particularly those who work for small businesses and don’t already have access to a defined benefit or defined contribution plan. In the typical scenario, as described by the National Conference on Public Employee Retirement Systems (NCPERS), a state would enact legislation to establish a Secure Choice plan in which employee participation is voluntary. Contributions would be made by employees and preferably employers as well. For participating employers, administrative and fiduciary duties would largely be removed and placed in the hands of the board of trustees. While each employee would have an individual participant account, all contributions to the plan would be pooled for investment purposes to achieve economies of scale and the ability to negotiate lower fees. To date, almost a dozen states have passed legislation to create secure choice plans and an additional two dozen have pending legislation to do so.
- ESG: Environmental, Social and Governance (ESG) issues will no doubt remain a hot topic for pension plans in 2021. As the CFA Institutes notes, ESG analysis has become an increasingly important part of the investment process and is “now entering a true mainstreaming phase” as investors incorporate ESG data to gain a fuller understanding of the entities in which they invest and the risks they face. Expect an increased focus on reporting standards and metrics in 2021.
- Regulatory Changes: A new administration in Washington will bring changes to federal agencies such as the DOL and the SEC that will affect pension plans. For example, the DOL’s guidance on ERISA rules on ESG investing, while not directly applicable to public pension plans, is influential in creating standards that are looked to even for non-ERISA plans. The SEC’s new rules on proxy voting and other issues will be closely watched for potential reversal in areas such as the rules governing proxy advisory firms, which underwent sweeping changes under Trump-appointed Chairman Jay Clayton. Also note that with control of both the House and Senate, Democrats may use the Congressional Review Act to reverse federal regulations made in the last 60 days of the administration.
- DE&I: Diversity, Equity and Inclusion, or DE&I as it is commonly called, is one aspect of the “S” in ESG investing. Look for increasing calls for corporate board diversity building on efforts by Nasdaq and others such as the U.S. Chamber of Commerce and the Real Estate Roundtable. Moreover, DE&I is also something that is increasingly being addressed by pension systems in their own internal policies and procedures. Several major pension funds stepped up their DE&I efforts in 2020 and more will likely do so in 2021.
Finally, here’s a jaw-dropping fiduciary story to carry you into the new year. We know that pension plans are long-term (or indeed perpetual) investors, but this really brings it home: in 2020, the last Civil War pensioner died. The 90-year-old woman had cognitive impairments, qualifying her for a lifetime pension as an adult child of a veteran. Her father, who served as a private in the Confederate Army before defecting to the Union, was on his second marriage when she was born just weeks before his 84th birthday.