Should big Pa. pension funds divest from Russia at a loss? It’s the moral thing to do but a state senator warned it may make oligarchs richer

Board members of the Pennsylvania state workers’ retirement plan watched nervously as the value of its Russian investments shrank rapidly — from $60 million at the end of last year to $21 million on Feb. 28, four days into the Russian invasion of Ukraine. Then it plummeted to $7 million by last Thursday.

Members debated whether the SERS pension fund should sell and take a tiny loss compared with its overall holdings to support an embattled Ukraine. Or whether they should hold on and wait for a recovery.

The arguments on both sides were pointed during the debate last week.

“Nobody supports Russia. But if we sell this, it’s a loss to our plan,” worried State Sen. John DiSanto (R., Perry), whose district lies northwest of Harrisburg. “The people who will benefit from this are the Russian businessmen, the oligarchs” who, he assumed, would likely buy the stocks cheap — then score big profits when Russia inevitably recovers.

» READ MORE: How the Russian invasion of Ukraine could affect the U.S. economy

But another Republican trustee, State Treasurer Stacy Garrity, said she started pushing for divestment of state funds from Russia the minute that Russia invaded: “We said, ‘Get out.’ Every dollar matters,” she told her fellow SERS board members.

Garrity noted that PSERS, the state’s $73 billion school employees fund, voted unanimously to divest $300 million Thursday, making Pennsylvania one of at least 20 states to take similar action.

Philadelphia’s pension board also voted Friday to divest its last Russian investments, which the city controller’s office said were worth about $6.7 million at last count.

The State Employees Retirement System has many of the difficulties of other funds in the state. Its $40 billion in assets cover only 69% of future obligations.

And the pension fund requires huge support to meet its obligations, including $2.9 billion from taxpayers last year, plus $408 million in payroll deductions from workers.

Its investments returned 17.2% last year, more than double its annual target but far below the S&P 500′s 28.4% return.

So losses on its Russia investments are a serious concern.

At the board meeting Friday, some trustees were skeptical when chairman David Fillman proposed dumping Russian assets.

Was divestment any more than a symbolic gesture? And wasn’t this exactly the wrong time to bail out?

The ruble first turned down in midwinter as Russia threatened war. Then it cratered in the last two weeks, as Western governments ordered financial companies to stop doing business in Russia. The country’s securities markets also shut down, making it harder for investors to get out. And Western companies began leaving Russia in droves.

Much of the money that found its way to Russian stocks had been invested through funds tied to global stock market indexes set up by Morgan Stanley and other investment banks. In the 2000s, those firms began including Russian securities alongside those of other fast-developing BRIC countries, shorthand for Brazil, Russia, India, and China.

Those indexes snapped up shares and sparked other investors’ interest in Russia’s large oil, banking, mining, steel, and communications companies and government bonds.

Now those same funds have announced plans to eliminate Russian companies from their lists since the invasion.

» READ MORE: Bucks County firm EPAM has sided with Ukraine, and will stop serving Russian clients

So even without action by pension boards, Russian stocks will be dropped from SERS’s indexed portfolios as soon as the fund managers can find anyone to buy them, said chief investment officer Jim Nolan.

But how can they sell, with the markets shut down? And who will end up buying these deep-discounted assets?

DiSanto argued that public officials’ energy would be better spent developing domestic oil and gas energy sources, to avoid rising imports of oil and gas from Russia. Those energy sales have kept the regime of Russian President Vladimir Putin going and supplied his forces in their attacks on Ukraine.

Rep. Paul Schemel (R., Franklin) was also cautious, suggesting that SERS should wait until legislators order them to sell, instead of taking a symbolic action that could hurt pensioners.

On the other side, members noted that its paper losses were a tiny fraction of its $40 billion fund.

Rep. Dan Frankel (D., Allegheny) called divestment “consistent with our fiduciary responsibilities. Clearly, this unprovoked, unjustified invasion and the threat of nuclear arms is a global threat to our pension systems.”

» READ MORE: Vanguard’s emerging markets funds largely escape Russia’s market debacle. Here’s some that didn’t.

Board chair Fillman, the head of the AFSCME union group representing state workers, also urged SERS to sell: “The purpose is to put the pressure on” Russian businesses and citizens, so they, in turn, pressure Putin “to back off.”

In the end, the doubters were convinced. The 11-member board voted unanimously, and SERS instructed staff to start plans for dumping the Russian stocks and other investments when they can.