Pension and other fiduciary trustees answer to us as ‘prudent humans’, a term which has legal meaning. In many countries, laws are on the books requiring trustees to exercise a prudent standard of care for their members’ futures.
Entrusting a fund to an asset manager to gamble in the financial markets, earning billions in fees in the process, is not prudent. Aside from the financial risks, it severs ownership of the fund from the consequences of its use.
Most of us, including most pension members, do not understand that savings are entrusted to fiduciary stewards in this way. As a consequence, we do not hold them properly accountable for how they use their capacity.
For their part, trustees sincerely believe that participating in the capital markets meets the standard of prudence. After all, it has always been done this way, hasn’t it?
No. Prior to 1970, most fiduciary money was invested in secure vehicles with a guaranteed rate of return, such as government bonds. For a deeper dive into the history, read here.
According to conventional wisdom, a pension trustee has a fiduciary duty to the pension’s members directly, but this not the case. A pension is a legal promise to make contractual payments to members at defined intervals. Fiduciary duty is owed to that promise.
Members don’t get to interpret what the promise is: it is defined under the law. However, they do have the power to hold trustees accountable if they fail in their fiduciary duty.
This is how the unrealized capacity of pensions can be realized.
