Going Back to the Text on Pension Fiduciary Duty. Going Back to the Facts on Pension Capacity.

Navigating through, and around, "the immune system of our culture"        

Starting with the basics, fiduciary duty is the duty the law imposes upon a fiduciary.

A fiduciary is a legal person authorized by law to act for a trust that is constituted by law to exercise control over money or other property for a purpose specified in the documents that create that trust.

Examples of trusts controlled by fiduciaries include:

• Private trusts for private purposes (such as “a trust for junior’s inheritance”);
• Public trusts for governmental purposes (such as land trusts for conservation);
• Business trusts for business purposes (such as voting trusts and unit investment trusts); and
• Social trusts for socially provisioning the social safety nets of Workforce Pensions and Civil Society Endowments.

The law of fiduciary duty requires prudence in the exercise of control over trust property, in undivided loyalty to the purpose set forth in the documents creating that control.?

The legal standard of prudence and loyalty is the prudent person, as a legal avatar for the common sense of reasonable people familiar with such matters, as to what makes sense under the circumstances then prevailing.

This standard of the prudent person applies differently to different kinds of trusts.?

In the case of a pension trust we can look to the Employee Retirement Income Security Action (ERISA) as a proxy for the law as it applies to pension trusts, more generally.

ERISA tells us:

The prudent person standard requires that a fiduciary act with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of like character and with like aims.

The key pieces to our puzzle here are:

1. a person acting in like capacity;
2. an enterprise of like character;
3. an enterprise with like aims.

We can articulate a concise statement of the aims of every pension trust, generally, by weaving together the following four points, from different legal sources, as follows:

• to invest money (the Constitution of the State of California)
• for income as well as safety (the Massachusetts Rule of Harvard v Amory 1830)
• to assure (the Constitution of the State of California)
• income security in a dignified retirement for evergreen populations of current and future retired workers (the US Senate HELP Committee).

A common way of talking about the loyalty owed by a pension trust fiduciary today is that they must act "solely in the financial best interests of the beneficiaries".  True. Also,  we must go to the text in the constituting documents to learn who the beneficiaries are, and what interests they have, relative to the trust. When we go back to the text, we uniformly learn that the beneficiaries are evergreen populations of current and future retired workers, and their interests are in the assurance of income security, each in their own personal and individual dignified retirement.        

Every pension trust is constituted by the law of its creation with the character of:

• Vast size
• Programmatic purpose; and
• Forever time.

The capacity of a fiduciary of a pension trust derives from its legally constituted character, of size, purpose and time.? This is a question of fact, not law, and varies under the circumstances, when circumstances change.

In the early days of pension trusts, a rule of convenience applied by the courts (sometimes called the New York rule) limited pension trust fiduciaries to investing like bankers, making loans at interest, with the added restriction of what was called the Legal List, limiting the lending of money to governments, high credit quality corporations and real estate as the only permitted borrowers.

In the early 1970s, the New York Rule of the Legal List was replaced by the Massachusetts Rule of the Prudent Person, largely in reliance on new learning from the 1950s and '60s about how prices move in the markets, that is popularly known as Modern Portfolio Theory.

Through an artful use of linguistic legerdemain, the Prudent Person became the Prudent Investor, and the expertise of capital markets professionals replaced the common sense of sensible people as the standard to which pension trust fiduciaries are commonly believed to be held.

Thus did capital markets professionals capture control over pension trust money, replacing legal accountability to our common sense with polemical accountability to their own expert knowledge, as a special pleading for their special interest in bringing these trillions into their markets, and keeping them trapped there.

Then, in 1983, Mitch Kapor released his Lotus 1?2?3 suite of computer applications running in MS-DOS on an IBM PC, giving financiers the new capacity to engineer financing agreements using spreadsheet math, desktop publishing and digital communication.

Pension trust fiduciaries who had been effectively sidelined into a procurement function, as captive customers of the capital markets, did not - and still do not - appreciate the new capacity this new technology for financial engineering gives to them. Neither did, or does, our common sense.

But the capital markets professionals who had captured both pension money and our common sense, did.

We were quickly treated by capital markets professionals to an avalanche of financial innovations, beginning with Merger Mania (a late 20th Century re-incarnation of Gilded Age Trusts, of the Teddy Roosevelt trust-busting variety), Hostile Takeovers by Corporate Raiders financed with Junk Bonds (precursors to modern Private Equity), and a alphabet soup of consumer debt securitizations: MBSs, CMOs (home loan mortgages) and ABSs (credit cards, auto loans and leases, student debt, etc.).

Stocks and bonds expanded into Financial Assets, and pension trust fiduciaries got re-branded as Asset Owners Allocating Assets Across Asset Classes, and within classes, selecting Asset Managers peer-benchmarked by Consultants for excellence in maximizing the highest possible purely pecuniary profit extraction through price-taking in the public, or financially engineered value creation, in the private, alternative, capital markets.

Today, it is time to go back to the facts on pension trust capacity, and back to the text on fiduciary duty.

Private Equity shows us that pension trust fiduciaries today physically and factually possess the capacity to use the circa 1983 vintage technologies of spreadsheet math, desktop publishing and digital communication to negotiate with enterprise of any size, in any business, anywhere on the planet.

Private Equity uses that capacity to financially engineer profit extraction through "value creation", which all too often uses pension trust money to undermine the current income and future dignity of the very workers for whom these pensions are constituted by the laws of their creation with a duty to assure security and dignity.

This feels like a colossal act of disloyalty, in violation of their legal duties as fiduciaries, of undivided loyalty to THEIR aims, not to capital markets profits.

There is another way.

Real Estate and Tax Credit Equity show us that the technologies of spreadsheet math, desktop publishing and digital communication, combined with size, purpose and time to negotiate, can be used to financially engineer socially beneficial cash flows through negotiated agreement on equity paybacks to an actuarial/fiduciary cost of money, plus opportunistic upside, for enterprise cash flows prioritized by contract for suitability of the technology to the times, longevity of the enterprise over time, and fairness in how the business does business all the time.

This is the kind of financial engineering that pension trust fiduciaries have the capacity to use for making the fiduciary money entrusted to their control flow into the right enterprises, in the right way, for their use in doing the right work, in the right way, for the right time, at the right cost and on the right terms, to form the right businesses for forming the right technologies for forming the right choices for forming the right economy for assuring income security in a dignified retirement to evergreen populations of current and future retired workers, directly, as a private benefit, that will also be, of necessity, the right economy for forming a secure society and keeping it ongoing into a dignified future for us all, consequently, as a public good.

If they have this power, it only makes sense that they should use it.

Some social dynamics that will benefit from upgrading pensions trust investing to financial engineering upgraded from Private Equity value creation to Stewardship Equity socially beneficial cash flows include:

• Impact Investing
• Social Enterprise
• The Right Economy for Social Security and Human Dignity
• A Rectified Financial System
• Retirement Security security
• Action on Climate Inaction
• Money for Nature from Business, through Finance
• No More Money for Dark Money capture of politics and public discourse
• A Return of Civility to Citizenship
• Renewed Power of our common sense to hold our institutions of agency and authority accountable for authenticity and integrity in their institutional exercises of their institutional authority/power true to their institutional agency/purpose/mission