Should state pension plans invest in gunmakers?

Even as New York Governor Andrew Cuomo pledges to fight gun violence, the state's pension plan for teachers remains invested in Sturm Ruger (RGR), a major manufacturer of firearms. The company's models include AR-15-style rifles, the weapon of choice for mass shootings, including this month's massacre at a Parkland, Florida, high school.

John Cordillo, a spokesman for the New York State Teachers Retirement System, told CBS MoneyWatch that no decision has been made about whether to liquidate its Ruger holdings. A Cuomo spokesperson didn't respond to a request for comment.

But New York, which this month joined forces with three other northeastern states to create a task force to combat the illegal trafficking of guns, isn't the only state where retired teachers and other public workers are effectively helping to bankroll the firearms industry.

Pensions in at least a dozen states own gun stocks, although those holdings are a sliver of their overall investments. Some of those plans are in states, such as Florida and Colorado, that have been the scene of school shootings, according to Bloomberg. The news service reports that Florida's State Board of Administration (SBA), which manages the Florida Retirement System Pension Plan, has rejected a request from Florida's Education Association (FEA) to liquidate its gun stock holdings following the Parkland shooting.

An SBA spokesman said Florida officials need to focus on actions to make schools safer and not put "limitations on investments that increase plan costs, potentially lower returns and consistently fail to produce desired social changes." 

As of December 31, public pension plans in Arizona, Louisiana, Michigan and Texas also held shares in Sturm Ruger, according to data from S&P Capital IQ. Two of the funds that own the company's stock -- The Teacher Retirement System of Texas and the Public Employees Retirement Association of Colorado (PERA) -- also have invested in American Outdoor Brands (AOBC). PERA, which has $48 billion management, reports holdings of $1.3 million in the firearms sector.

American Outdoor Brands, which until 2016 was known as Smith & Wesson, made the weapon that accused Florida shooter Nikolas Cruz used to murder 17 people at Marjory Stoneman Douglas High School.  

Another pension fund with a stake in American Outdoor Brands is the Ohio Public Employees Retirement System. Ohio Governor John Kasich has reportedly angered gun-rights groups by hinting that he would be amenable to restrictions on the public's right to own AR-15s. Spokespersons for the fund and Kasich didn't respond to requests for comment.

New Jersey lawmakers this week introduced a bill that would prohibit the state from investing any pension or annuity fund assets in manufacturers of firearms or ammunition. According to State Investment Council chairman Tom Byrne, New Jersey doesn't currently hold any shares in the sector. 

Despite the furor over gun control, however, exiting gun stocks isn't necessarily straightforward for retirement plans. For one thing, most pension funds own such shares as part of funds that mimic benchmarks like the S&P 500 or Russell 3000, acquiring every stock in the index. The investments are typically handled by outside fund managers, such as BlackRock or Vanguard. 

Pension plans and fund managers also are required by law to follow a fiduciary legal standard in how they operate. That means investing on behalf of plan participants in companies that net the highest possible investment returns.

"These pension funds are tax-exempt partly on the basis that they operate as trust funds," said Keith Brainard, director of research at the National Association of State Retirement Plan Administrators. "Those who administer trust funds have a fiduciary obligation … to make decisions that are solely in the interest of plan participants."

BlackRock, the world's biggest money manager with $200 billion in assets, has said it plans to "engage" with gunmakers about their response to recent events, without providing any specifics. Vanguard argues that it strikes a balance between its fiduciary responsibility and its wider corporate responsibilities.  

"That said, I cannot give details on any engagements with specific companies," said Carolyn Wegemann, a spokeswoman for Vanguard, by email. "We take a 'quiet diplomacy focused on results' approach to engagement -- providing constructive input that will, in our view, better position companies to deliver sustainable value over the long term."

BlackRock didn't respond to a request for comment.

A 2016 analysis by Boston College's Center for Retirement Research, looking at plan data between 2001 and 2015, found that funds in states with divestiture requirements -- because of issues ranging from the Iran nuclear deal to concerns about fossil fuel consumption -- underperformed their peers by 40 basis points. 

Yet that view is disputed by social investing advocacy groups like the Forum for Sustainable and Responsible Investment, which says studies show that most companies benefit financially by engaging in sustainable practices.

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    Jonathan Berr is an award-winning journalist and podcaster based in New Jersey whose main focus is on business and economic issues.