By June 27, 2017 Read More →

Study reveals oil & gas divestment of pensions could cost trillions – IPAA

divestment

Divestment

Fossil fuel divestment would cost nation’s top 11 pension funds up to $4.9 trillion over long term

A first of its kind study finds public pension funds could lose trillions of dollars if they divested from fossil fuel related investments, according to a release from Independent Petroleum Association of America(IPAA).

The new report, authored by Prof. Daniel Fischel of the University of Chicago Law School, together with coauthors Christopher Fiore and Todd Kendall of the economic consulting firm Compass Lexecon, analyzes 11 of the nation’s top pension funds.

Including the largest state pension fund, the California Public Employees’ Retirement System (CalPERS) as well as municipal funds in New York City, Chicago and San Francisco – to determine the financial impact of divesting from fossil fuel securities.

divestment“Our report shows divestment would cost pension funds trillions of dollars, an outcome that likely would significantly harm returns for pensioners. Given the unique role of the energy sector in the economy, investors who chose to remove traditional energy from their investments reduce the diversification of their portfolios and thereby suffer reduced returns and greater risk,” said Prof. Fischel.

The results indicate that these funds would lose up to a combined $4.9 trillion over 50 years due to reduced portfolio diversification.

“And that’s not all. These costs are further compounded when considering the additional costs of transactional fees, commissions, and compliance costs that are unavoidable when divesting. Divestment may seem noble, but it has real financial implications for pension funds, many of which are already struggling to provide reliable investment returns to beneficiaries,” said Prof. Fischel.

In order to accurately calculate the cost of divesting, Prof. Fischel and his coauthors used all available data on the current holdings of each fund to estimate the returns on the same or similar holdings over the past 50 years.

These returns were compared to returns over that same period from an otherwise identical risk-adjusted portfolio, stripped of stocks targeted by divestment advocates.

The report considers lost diversification benefits due to divestment from coal, oil and natural gas companies, as well as broader divestment including utility companies, which creates a range of possible outcomes.

The report finds that a divestment policy would hit California’s CalPERS fund the hardest, with reductions in returns ranging from $2.3 to $3.1 trillion over 50 years, and up to $290 million annually.

New York follows close behind, with the New York City Employee Retirement System (NYCERS) — the largest municipal public employee retirement system in the United States – estimated to suffer between $502 and $692 billion in lower returns over 50 years.

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The annual impact for NYCERS ranges between $41 and nearly $60 million.

These impacts are merely the tip of the iceberg for many public pensions that are already deeply underfunded. Currently, the 100 largest public pensions in the U.S. are funded below 70 per cent, and total unfunded liabilities are approximately $1.25 trillion.

“At a time when pensions across the country are struggling to generate sufficient returns, divestment would impose a staggering financial penalty, making it even more difficult to meet payout obligations for their beneficiaries while having no impact on the environment,” said Jeff Eshelman, senior vice president for operations and public affairs at the Independent Petroleum Association of America (IPAA). 

Further reductions in investment returns could exacerbate the issue and lead to financial consequences for pensioners or taxpayers in the future.

“As a consequence of these mounting costs, pensions would either have to cut payments or seek other funding sources to make up the shortfall.  That would put an even heavier burden on taxpayers who could be responsible for financial bailouts to compensate for these losses,” said Eshelman.

Read the full report and fact sheet online.

Posted in: Energy Financial

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