NCPA - National Center for Policy Analysis

A Strategy of Failure for Pension Funds

June 8, 2001

In an attempt to be politically correct, some politicians have meddled in their states' pension funds -- under the slogan of "socially responsible" investing. In the process, they have denied those funds the opportunity to reap hundreds of millions of dollars in profits.

Pension funds have a clear mandate to maximize income on the money entrusted to them by fund members -- not pursue social goals, legal and financial experts maintain. But politicians have steered fund managers into following the latter course -- most notably by forcing them to dump tobacco stocks.

Nine states have divested or limited the tobacco investments of their pension funds -- selling off more than $3 billion worth of shares in the process.

  • California pension funds divested themselves of $800 million in tobacco stocks in 2000 -- shares which subsequently appreciated by as much as $447 million.
  • Florida sold off $835 million in tobacco shares in 1997 -- and is now considering reinvesting.
  • Kentucky began the partial sale of its tobacco stocks in 1996 -- then rescinded its policy in late 1998.
  • In April 1996, Maryland became the first state to sell all its tobacco holding -- then started buying them back in 1999.

The American Stock Exchange's Tobacco Index has more than doubled since 1999 and Philip Morris was the best-performing Dow Jones Industrial Average stock in 2000. The shares rose, in part, because of a perception among investors that the worst was over for tobacco companies, following the $246 billion settlement with the states.

Aside from their pension investments, states have enormous financial stakes tied to tobacco. They collect some $12 billion in cigarette taxes a year. And the $246 billion master settlement has given them an even greater stake in the industry's viability.

Source: Christopher Palmeri, "Politicians Should Butt Out of Pension Funds," Business Week, June 11, 2001.


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