Evolving the Standards of Fiduciary Prudence for Pensions and other Superfiduciaries
40 years ago, almost everything our pensions are doing today was against the law.
That law is the law of fiduciary duty. It requires persons entrusted with discretionary authority over other people’s money to exercise prudence in the choices they make with that money.
For hundreds of years, the common law of fiduciary duty held that speculation by fiduciaries with other people’s money entrusted to their good judgement was a violation fiduciary prudence, and therefor against the law. Trading in stocks, bonds and other securities is by definition, speculation (look it up; it’s in the dictionary). So trading in securities by pensions as fiduciaries was against the law.
In 1972, a committee of lawyers decided to overrule the dictionary – and hundreds of years of common law and common sense – and write a model law intended to become a uniform state law – the Uniform Management of Institutional Funds Act – that declares as a matter of legislative fiat that if it is reasonable for individuals to use portfolio diversification to manage speculative risk when trading in securities with their own money, for their own account, then is it also reasonable – and therefor within the bounds of prudence – for fiduciaries to trade in securities with other people’s money if they do so through a proper program of portfolio diversification.
After a slow start, vast sums of pension money began pouring into the Wall Street system, and a whole new profession of Asset Managers has grown up to provide professional portfolio management of this pension money. So much so, that a new professional elite now dominates the trading markets. This might sound like a good thing, until one considers that the Wall Street system is actually designed for the masses; not for the elites.
While the movement of pension funds into the trading markets has clearly been a boon for the elites, it is a lot less clear whether pension-funded elites taking over the trading markets has been good for the rest of us. Since the 1970s, we have lived through the collapse of the Savings & Loan industry, the collapse of the dot.com bubble, the collapse of Long Term Capital Management and the somewhat euphemistically named Global Financial Crisis of 2008, which very nearly brought about the collapse of civilization as we know it. Over this same period, we see evolving patterns of wealth concentration that many interpret as a devolution towards elitism in society and the economy, more generally.
There is another way that pensions can invest in the economy, to generate the cash inflows they need to keep their risk pools properly full and flowing, without driving our economy towards a new elitism. Pensions can negotiate. They do not have to speculate.
As individuals, we cannot negotiate. Our best choice is to speculate.
Our savings available for investment are small, relative to the capital needs of commercial enterprise operating at mass market scale.
Our purpose for investing is opportunistic.
We are indiosyncractic in the nature and timing of our own individual life events.
As participants in a pension pool, we are not so limited. And remember, as taxpayers, we all participate in the pension system, even if we are not, individually, a current or future retiree in any single, specific plan.
Through the pension pool, we already aggregate vast sums of individual surpluses that are, some individually, and all taken together as a group, as large or larger than almost any commercial enterprise operating at even the most massive of mass market scale.
As a pension pool, the pool fiduciaries who have the authority and the responsibility to act in our best interests have a very specific purpose for which they are investing, which is to generate adequate fiduciary cash inflows as required to keep their pension pool properly full and flowing, forever.
Also, as a pension pool that just keeps going, always being invested to always be generating adequate cash flows, forever, commitments for financing can be constructed that match the needs and the opportunities of the enterprise being financed.
This is something that is UNIQUE TO PENSIONS, and a uniquely powerful feature of the design of an investing system that is purpose-built to fit the powers and purposes of pensions as perpetual investors. The investment can be tailored to fit the needs of the enteprise. THE ENTERPRISE DOES NOT HAVE TO BEND AND TWIST TO FIT THE NEEDS OF THE INVESTMENT.
This is not possible in the Wall Street system. In that system, the enterprise has to grow its future value, because growth in future value is what lets the trading markets deliver on their promise of instant liquidity, on demand.
This brings to top-of-mind a fundamental truth about enterprise and the economy that gets buried inside the growth mythology of the Wall Street system. Times change, and people adapt to changing times. We adapt by evolving new technologies – understood in the orginal Greek meaning of the word, as “practical knowledge of how the world about us works, and how we can change that world to make it work more a way we choose it to” – that give us new choices. And we organize new enterprises through which we evolve those new technologies for making prosperous adaptations to life’s constant changes. Enterprise and the economy are really about change, and evolutionary adaptation to change.
Every enterprise starts out small and unpopular, grows in popularity for a time, continues strong as choice that remains popular for some time and eventually fades away, as times change, and people make new and different choices in adaptation to those changes.
Pensions have the power to construct investments that ride the life cycle of enterprise and technology that is the real pulse beat of prosperity, investing in enterprise cash flows, directly, to generate adequate fiduciary cash flows, forever – not from a single investment in a single enterprise that is designed to never end, but through an open-endedly evolving historical timeline of investments in different technologies being evolved through different enterprises for making prosperous adaptations to life’s constant changes, as times change, and people adapt to changing times.