Good guys vs. Good enough guys
Follow the money to see how vast pension investments thud
Investigative journalism that exposes criminal enterprise uses, among its tactics, financial sleuthing that “follows the money.”
There on Page 1, the kingpin is revealed after piecing together the complex flow of money to and from shell companies, slush funds, and other sketchy sources of ill-gotten gains made familiar to fans of TV police procedurals.
The US Department of the Treasury even has a specialized “follow the money” bureau to battle money laundering and terrorism financing.
How money moves proves a bad guy’s intention to finance bad deeds.
At Bank of Nature, we are engaged in a similar “follow the money” exercise, but our “perp” wears a hero’s white hat, employs 68 people and operates out of State Street, Boston offices.
The Massachusetts Pension Reserves Investment Management (PRIM) Board may not be flying suitcases of cash to the Caymans, but it does control a $96.6-billion empire. How those billions move from point to point, per the limitations of law, decides how we live well, or less well.
That empire is built on a specific purpose: To future-proof the golden years of its own promisees — which, by extension, helps the rest of us. PRIM, like its peers around the world, falls short of that promise not because of ill intent but by bad design.
The PRIM of today is the type of:
Independent, billion-dollar pension-making machine that gaslighting partisans want to control, even if they have no right to control it, in ways that may be contrary to PRIM’s design. Evidence is the US feud over state-level pensions, fiduciary duty and ESG-rated securities that only muddies our understanding of important fiduciary protocols.
Money that, until this Bank of Nature initiative, has not yet been singled out as having its own rules by which controlling governments, enterprises and individuals don’t have to abide. The co-mingling of its fiduciary billions with non-fiduciary agendas is not PRIM’s error but one it must correct nonetheless.
How does the flow of nearly $97 billion prove a good guy’s fulfillment of the good deeds required in law?
The focus then is not whether PRIM is a “good guy” but to what degree it plays the role of “good enough guy”.
Following the money tells PRIM’s fiduciary numbers story
PRIM works from a central fund called the Pension Reserve Investment Trust (PRIT aka PRIM’s $96.6-billion bank account). PRIM invests that principal — or corpus — to make the returns required to keep PRIT able to pay benefits to eligible pension promisees far into the future. And, while PRIM’s investment strategies generate the returns required to pay retirement benefits, it doesn’t presently square that ROI with future damage — even today when we know how finance is correlated with the climate emergency. It’s not whether PRIM must make money that is our concern, but how it makes that money. Generally,
70% of PRIM’s investment activity is trapped in Wall Street-style price trading and has marginal influence on the actual economy — despite its negotiating power to do more.
30% of PRIM’s holdings are invested directly in the “real” economy — like brick-and-mortar companies — but are not vetted for their positive and negative longer-term impacts.
100% of PRIM’s outbound financing goes through third-party investment consultants paid almost $500 million per year in commissions and fees, which converts public money into private wealth.
PRIM’s fiduciary oversight ends when it delegates its billions to non-fiduciaries who are not held to fiduciary standards.
Paying owed benefits checks to retired civil servants is literally the least PRIM can do.
That’s not good enough when the stakes are high and fiduciaries of public pensions everywhere have the mission, duty and enormous financial scale to address climate and other crises ignored by market-based economics.
If you think we are asking too much of fiduciaries in charge of billions and trillions of consequential economic activity, be comforted that pensions don’t need to save the world, only the world inhabited by their own beneficiaries.
Calling out PRIM, specifically, happens only because it’s in my ‘hood. It’s a fiduciary money case study. It’s the subject of our Senate Bill 1644. PRIM is no worse nor better than the rest of the fiduciary sector.
Also, to be emphatically clear, I have no concerns about anyone’s professionalism or ethics at PRIM. The Massachusetts fiduciary is dead serious about its job and works to a best practice standard equal to its peers around the world. PRIM even receives industry awards for its fiduciary work, albeit from its own government, from groups that represent the “asset managers” PRIM hires and from an association focused on private equity — which is 18% of PRIM’s financings.
Today’s PRIM has inherited a badly designed system based on “prudence” standards that predate seismic shifts in technologies, tax policies, world views, urgent global crises and the behemoth financial scale of pension funds. A modern “commonsense” review, like we lay out in SB1644, must be done to repair what is a dangerously outdated and non-fiduciary way of working.
That’s the problem this PRIM can fix.
Like its peers, PRIM is coasting on a retirement system that failed to respond appropriately to the Unseen Revolution 50 years ago that, overnight, turned pensions into institutional investors that amplify the worst in growth-focussed economics. It's PRIM's job now to show us how it passes its fiduciary obligations guided by modern “commonsense.”
It should want to. An organization so vividly committed to a future for its own promisees should brag about its leadership in curating a future worth retiring into. And, since PRIM is tracking our legislation, it’s not like it can say it isn’t aware of what might be done otherwise. The PRIM board could even start to engage with it now instead of waiting to be pushed.
Mapping PRIM’s money
We won’t understand how the byzantine Massachusetts retirement system works for or against the future without unpacking its component parts. It’s too much for a single article, so this is the first post of a Follow the Money series that will eventually include our Bank of Nature takes on:
“What the hell else should PRIM do?” Plenty else.
“Why are you stealing my pension?” Actually, this protects all pension promisees equally over time.
“Growth! Where’s the growth?” It’s in sufficient cash flows from fiduciary-grade financings.
And other defenses of a status quo that fails fiduciary duty standards.
To sort it, I am using a mapping system to draw out the details disclosed in an array of public documents like the 2022 Annual Report, fact sheets, presentations, newer quarterly updates, and valuation reports.
Depending on their publishing dates, the sources vary in the equivalent details. That means, read these maps and analysis with a reasonable +/-margin of error of magnitude, rather than exactitude. Unfortunately, there is no “Here’s how we secure your dignified retirement future” report that brings it all into focus.
This pared back, “Big Picture” map shows how money moves from PRIT, through PRIM, into society and back again. The sketch is intentionally simple. It is only one part of a larger retirement system map. The entire picture is far messier.
Starting with the green box, PRIT presently holds $97 billion in fiduciary money that is dedicated to generating dignified retirements owed to public service workers whenever they are due.
Move to the purple box. PRIM is the fiduciary in charge of executing investment strategies that contribute to the retirement system’s capacity to pay benefits to its eligible retirees.
Like common practice around the world, PRIM allocates its holdings to non-fiduciary, third-party “asset manager” specialists who are paid to bring deals to the PRIM board for approval. PRIM lists eight types of investment categories such as Private Equity, Global Equities and Real Estate.
The outbound money goes in two basic directions:
About $68 billion is captured by speculative private and public markets. The money goes around and around buying and selling price-based shares that are impacted by market volatility. PRIM’s loyalty is to the selling or exiting price, regardless of what it means to its fiduciaries and their quality of living.
About $29 billion goes to the economy. This is direct spending in, say, forestry. The dotted blue line from Exchanges to Economy represents potential money, if any, generated by new stock issuances (like Initial Public Offerings) that would transfer to the economy before shares start trading on good or bad news.
As PRIM’s investments churn through the various channels, they generate a gross 6% annual gain that, once fees are paid, settles out to a net $5.4-billion return (a 5.6% actuarial ROI) .
What do we learn from “following the money”? What’s actually wrong?
Money the scale of climate with the duty to lead on climate is misplaced in speculative, growth-centric financings that work against climate.
Money that has the scale to negotiate better deals that PRIM can control is instead locked in speculative trading markets it can’t control.
Pension funds are complicit in an extractive status quo that actively devalues the future.
The status quo insists that, with regard to our public pension system, nothing is broken that's worth fixing. The safer alternative path, as we suggest, would shift $30 trillion in global, aggregated pension holdings from the status quo’s control to financings that help a specific group of people — like 26 million US public servants plus their civil service colleagues around the world. No one with $30T in their back pocket will just give it up because it’s the right thing. However, they must heed the legal thing to do — and they don’t.
Whether you agree or disagree with the status quo’s handling of the future, the "follow the money" exercise shows you how $1 is flipped into $1.056. Do you condone the methods?
Our project challenges the neoliberal bias of “growth” and shows it to be more than Wall Street winnings. There are alternative financing choices that fulfill the duties of loyalty, care and impartiality and fit the fiduciary financier’s design.
We are highlighting the generational schism in public pensions that pits current retirees who are collecting hard-earned benefits now against the unmet obligations to PRIM's youngest eligible promisees. Presently, 33% of MA’s public sector workers “contributing” 9% of each paycheck to PRIM’s activities are younger than 40. On the calendar and after a full career, their retirement dates are between 2048 and 2063, when global society is supposed to be “net zero” on emissions. Is PRIM helping or hindering its own government’s environmental goals?
PRIM says: “We are focused on building a portfolio that maximizes our probability of achieving the actuarial rate of return while minimizing risk and cost. We believe that evaluating any investment and any portfolio must focus on three equally important parameters: return, risk, and cost.”
That sounds official but it wastes the negotiating power of a pension fund to, literally, change how the global economy works for the better.
Return is more than a percentage return on investment. Even when conservatives talk up “maximized returns,” ROI is not specifically defined as financial. As we propose, a fiduciary’s actual return is also qualitative. A pension fund is neither a bank nor a mutual fund. It has a different set of operating rules not yet acknowledged in the status quo.
Risk is more than financial losses and bad stock picks but must include the risk of accruing damage to the future. Risk is most relevant when PRIM has 70% of its holdings riding the whims of the market. Risk is moderated by negotiating the deals it wants because it has the money to demand them.
Cost is more than what PRIM pays in third-party fees and administration expenses. What are future retirees going to pay in non-dollar terms to live in a future of PRIM’s creation?
Wait, how can PRIM design a future? Why should it?
Whether PRIM likes it or not — and whether the world acknowledges the power of fiduciary money to lead extra-governmentally on crises like climate or not — PRIM is in a category of money that is so big it makes a difference to everyone.
If, as happens in common practice, you reduce all that $97 billion does to shape the economy and our collective future to a single number, you are ignoring all the other impacts that go with how PRIM produced that number.
Pension promisees don’t live in a number. They live in a habitat made worse or better by PRIM’s decisions to put $97 billion to work to deliver that future.
So, aside from all the off-topic political foofaraw about public pensions, if you're looking only at the flow of money, is PRIM’s “good” good enough?
Stay tuned for more Follow the Money posts that dig into the Massachusetts retirement system. Please share, like and comment as appropriate. We welcome challenges, corrections, counterpoints and other debates that showcase the many issues related to how billion-dollar pensions show up, or don’t, in the economy.
I really had no idea about the potential positive impact of pension funds. Who knew? And thanks for the graphic. Since over 60% of people are visual learners and financial flows can get complicated very quickly, having the graphic with the article was very helpful.