a website on a mission to promote bold, innovative and practical action to change the way pensions invest,
simultaneously fixing the retirement system and the financial system
while opening up new pathways to action on many of the greatest existential challenges of our time,
including climate, energy, education, opportunity and the economy
Why pensions?
I started my legal career in 1980, just as the party was really getting started.
Over the following 30+ years of my career, I have lived and worked through the collapse of the Savings & Loan Industry, the collapse of Long Term Capital Management, the Collapse of the dot.com bubble and the euphemistically named Global Financial Crisis of 2008, that almost brought about the collapse of civilization as we know it, together with an long litany of less spectacular financial system failures. Now, I am living and working through a rapidly accelerating erosion of Defined Benefit pension plans and their surreptitious replacement with Defined Contribution savings accounts, leading towards a collapse of our retirement provision (a proper pension plan – a Defined Benefit plan – provides money to live on for as long as we live; a retirement savings plan – a Defined Contribution plan – only provides money to live on until the savings run out…then, what are we going to do?).
It is hard not to live and work through all this collapse and erosion, without developing a nagging feeling that something has gone wrong. Many others share this belief, and choose to cast blame and find fault, echoing many variations on a common theme of “we have too many bad actors acting too badly, and these bad actors need to be made to stop acting so badly”.
Having worked inside the financial industry, and seen the way this industry actually works, and why it is not working the way we need, want and expect that it should, I find this “moral failings” theory of change unsatisfying. Instead of casting blame, I think we have to find a better way.
My search for that better way begins with a diagnosis of the present way. In conducting that diagnosis, all roads lead to Wall Street, and the pension industry.
For decades, Wall St. had been trying to convince pensions to put the vast aggregations of other people’s money entrusted to their good judgement into the stock market. For decades, they had been stymied by the law of fiduciary duty, that prevents fiduciaries, like pension funds, from speculating with the other people’s money entrusted to their good judgement. Trading in stocks and bonds is the very definition of speculation. Look it up. It’s in the dictionary.
In 1972, Wall St found a solution to this vexing fiduciary prudence problem. It is called the Uniform Management of Institutional Funds Act. It declares, overruling centuries of common law and common sense, that trading in securities in not speculation if it is done through a portfolio of properly diversified trading positions constructed on the principles of Modern Portfolio Theory, which asserts that individual share price volatility always reverts to a trend line of constant growth, over time and on average. It is the law of statistics applied to stock prices.
The Uniform Act is something called a Model Law. It was written and published by a self-organized committee of lawyers called the National Commission on Uniform State Laws. It is not a law making body. It’s members are not elected representatives of the people. It is supposed to be a specialized task force assigned to study idionsyncracies in the laws of different states that make it unnecessarily difficult for people to conduct business in different states. No state is required to enact any Model Law. Each state is free to consider and decide on its own.
By 1973, 43 states had enacted the Uniform Management of Institutional Funds Act. Amazing.
It took a little while to get things going, but by the 1980s vast sums of pension money were pouring into the stock market, changing the way those markets work.
What have we learned?
- Pensions and other superfiduciaries putting their superfunds into the economy as equity into enterprise is good for the economy, for society and for society’s superfund set asides.
- Doing it through securities trading is not.
experience is proving that it is not reasonable for pensions to both trade in securities, and expect to achieve their fiduciary purpose, as they now do
but
what else can they do?
Imagine with us this possibility.
Imagine that it is reasonable for pensions to invest in enterprise cash flows, directly
in order to generate adequate fiduciary cash flows, forever
if pensions can do that,
isn’t that what they should be doing?
this is the question we need you to join with us in asking of our pension fiduciaries — and also of other superfiduciaries of the superfunds we set aside for social benefit, like university endowments and endowed foundations
if you do ask this question, and enter into conversation with yourself and others about its answer,
we predict that you will set off a series of explosive insights into money, finance, enterprise and the economy
— we call them aha! moments —
that will help you see why our financial system is (dys)functioning the way it now is,
and how we can change it to make it function more the way we need, want and expect that it should
a change that begins with this shocking realization
Almost everything our pensions are doing today was against the law 40 years ago!
The law we are talking about is the law of fiduciary duty.
It is a law that requires fiduciaries – like trustees of retirement system pension funds, university endowments and endowed foundations – to be loyal, prudent and competent in all their dealings with the aggregations of other people’s money we entrust to their good judgement.
The key for investment is prudence, because the legal standard of prudence is based on what society believes is reasonable.
Forty years ago, society was agreed that speculating in the stock market with fiduciary funds was not reasonable, and therefor not prudent, and so also, not legal.
Forty years ago, state legislatures overruled hundreds of years of common law and common sense, to declare that building and maintaining a properly diversified portfolio of stocks, bonds and other securities was a reasonable way for individuals to invest in the markets, and so also a prudent practice for fiduciaries.
What these lawmakers did not understand is that there are important differences between individuals and pensions when it comes to reasonableness, prudence and investing.
Pension funds are large. Individuals are small.
Pension funds are purposeful, and programmatic. Individuals are opportunistic, and idiosyncratic.
Pension funds are forever. Individuals are not.
Individuals are risking their own money. Pensions are risking other people’s money.
When you start pulling on these differences, you start seeing the retirement system, the Wall Street system, the financial system and the economy in a very different way. We call it an evergreen way.
Then, we predict, you will want to join with us in…
adaptively evolving a new standard of evergreen fiduciary prudence for superfiduciaries
making bold, innovative and practical use of a new philosophy of the economy as an expanding universe…a universe of technology evolving in endless pursuit of prosperity…prosperity as a goal towards which we always strive, and also as a place at which we never, ever, really quite arrive
because all prosperity is provisional, suited to the moment, but subject to change as the moment changes
In this model of an expanding universe economy, the economy is conceived as a network of intellectual and interpersonal connections between people for doing work and sharing wealth. This network is more or less constantly being reconfigured, with new connections being added and older connections being allowed to fade away, as time change, and people adapt to changing times through inquiry, insight and the invention of new knowledge that supports new work that adds new to the wealth of choices we can make for how we want to take the world about us as we find it, and change it to be more a way we choose it to be.
powered by a nuclear core of individually saved surpluses aggregated and deployed in support of enterprise evolving technology in pursuit of prosperous adaptation to life’s constant changes through one of six different logic gates for financial decision-making; six forms of finance as how society chooses which technologies for making a future history of prosperous adaptation to life’s constant changes can, should and will be pursued through enterprise
- Family & Friends
- Church & Charity
- Taxing & Spending
- Banking & Lending
- Financialization & Growth
- Superfiduciary Stewardship
each designed to fit its own proper purpose of valuing the values its values, making each the right choice for the right purpose, at the right time
this is BIG stuff
also, it is good stuff!
six major epochs in the evolutionary history of our expanding universe economy
six major epochs in the evolutionary history of our expanding universe economy
aha!
maximizing utility under conditions of scarcity in a free enterprise “sailing ships” economy of exploration, discovery, colonization and trade ruled by the Invisible Hand of consumer choice and financed through Banking & Lending is one form of Capitalism
Free Enterprise Capitalism
aha!
growth in future value through economies of scale in a mass market “railroads & factories” economy of standardization through industrialization ruled by the New Aristocracy of Corporate Bureaucracy and financed through Financialization for Securities Trading is another form of Capitalism
Mass Market
Capitalism
aha!
the evolution of technology through enterprise for making prosperous adaptations to life’s constant changes in a evergreen “adaptive networks” economy of change, and evolutionary adaptation to change ruled by the Enterprising Individuals and financed through Superfiduciary Stewardship is the newest form of Capitalism
The Next Form
of
Capitalism
What was there, before there was Free Enterprise?
giving us today – potentially – the most powerful financial system in history
showing us how all investment begins with surpluses saved by individuals
that pass through one or another of various different logic gates for financial decision-making
into enterprise for evolving prosperous adaptations to life’s constant changes
to create opportunities for new learning that supports new earning, new spending, new saving and new investment in new enterprises
in a process of change and evolutionary adaptation to change that is automatically self-regenerating and endlessly ongoing
a new foundation for a hope-filled future in the new millennium,
and beyond
new choices for pension investing
new choices for enterprise finance
new choices for learning by teaching
new choices for individuals
new choices for society
?
but where
are
our superfiduciaries
Why do we call them “super fiduciaries”?
We use the word “super fiduciaries” to separate fiduciaries for pension funds – and their peers at university endowments and endowed foundations – from ordinary fiduciaries for one or more named individuals under a time-limited charter of trust. Superfiduciaries are fiduciaries for entire populations of people under a charter of trust that just keeps going, on and on, without any scheduled, pre-determined, or legally required ending date.
Ordinary fiduciaries are very much like the individuals for whom they are fiduciaries, when it comes to their powers as investors.
Superfiduciaries are stewards for an evergreen population of people that is so large, and so representative of the larger population, overall, as to make them effectively stewards for all society, because the choices superfiduciaries make affect us all, whether we are technically within their charter of trust, or not.
Also, superfiduciaries enjoy the special privileges of exemption from income tax that is accorded them by society because these superfiduciaries are perceived by society as stewards of important benefits to all of society.
So, in our philosophy, it is not reasonable to apply the same standards of loyalty, prudence and competency to superfiduciaries as apply to ordinary fiduciaries. We give them more, and we are entitled to expect more in return.
received wisdom from an earlier time, that has become conventional orthodoxy in our time, teaches that pensions must trade in securities in order to grow their assets
we are not so sure
instead we ask ourselves, what if the purpose of a pension is not to grow, but to just stay strong, generating adequate fiduciary cash flows, forever, so it can deliver income security in retirement to its retirees, indefinitely
IF
the purpose of a pension is to generate adequate fiduciary cash flows, forever
WHAT IS
the best way for a pension to achieve that purpose?
Conventional orthodoxy starts with the investment choices that are currently available, and reasons – correctly, from that premise – that given only those limited options, pensions need to invest in securities in order to generate adequate returns on their investing activities.
BUT we ask
What if there are other options?
Who says that trading in securities is the only way pensions can invest in enterprise?
Why should we believe that they are right?
there are actually two ways that aggregators of individual surpluses – like pension plans – can invest in enterprise
cash flow
direct
capital gains
derived
What if the purpose of enterprise is to generate cash flows from customers, indefinitely?
How, then, does an enterprise for generating cash flow
become a security that gets traded at a price?
How is the price derived, if not from the cash flows?
If enterprise generates cash flow,
and pensions need cash flow
why bother with a price, at all?
Why not just connect pensions with enterprise cash flows, directly
as the most authentic strategy imaginable for generating adequate fiduciary cash flows, forever