Unions, Pension Funds, and the Economy

...ACTWU's (Amalgamated Clothing and Textile Workers Union) JP Stevens campaign in the late 1970s combined union ownership of pension funds with a corporate campaign...

...and (3) the lack of union bargaining strength...

...One recent example is the Bricklayers' and Laborers' Non-Profit Housing Co...

...Unions have argued that because they own the funds they should have control over the investments...

...There are gaps in capital markets...

...they would also lose the advantages pension strategies yielded (for instance, in corporate campaigns and construction financing...

...Worker's forced savings are a social creation and, therefore, should be controlled by society—made up mostly of workers...

...Investments in union-only built construction, or in other ventures beneficial to members, can be made only if the funds do not sacrifice a risk-adjusted monetary rate of return...

...Although the stock market has its disadvantages for management—it dilutes management's control over the firm—it is an attractive source of credit for corporations...

...A similar agreement followed at GM in 1984...

...Identifying the owners of pension funds is not equivalent to identifying the source of funds...

...The Taft-Hartley Act of 1947 prevents unions from having sole control over their workers' pension funds...

...The relationship between employer pensions and union bargaining strength has irrefragably changed...

...Pensions and U.S...

...Marc Stepp, a UAW vice president, also wrote to the employees, disputing the company's claims that auto manufacturers would drop their contracts if Reeves Brothers went union...

...Jointly trusteed pension funds are mainly in the building trades...

...A prime example of the defensive use of pension funds is a coordinated corporate campaign...

...It enlisted the help of a UAW (United Auto Workers) local in organizing the North Carolina firm of Reeves Brothers, Inc...

...There are other building trade investment projects, such as the Union Labor Life Insurance Company (ULLICO) "J for Jobs" project, which invests union pension funds in an open-ended trust that invests in union-built construction (ULLICO is a life insurance company founded by the AFL in 1920...

...Even if the local overcame the information problem and ascertained what pension funds actually owned shares, organizing a boycott would be difficult if the pension participants weren't unionized or if the union didn't have access to the investment manager (as is the case for over two-thirds of workers in collectively bargained pension plans...

...Although Chrysler workers took a pay cut and were severed from the GM and Ford agreements, Chrysler agreed that 10 percent of all new pension contributions would be invested in health maintenance organizaFALL • 1988 • 469 Pension Funds tions, worker housing, retiree centers, and other socially desirable projects, as long as a "reasonable" rate of return (measured only in terms of monetary rates of return) was earned...

...Unions need bargaining strength in order to negotiate representation on single-employer, non jointly trusteed pension investment boards...

...A union election was held...

...Most pensions weren't portable (and still aren't...

...Over time, the percentage of corporate stock held by pension funds increased considerably, FALL • 1988 • 467 Pension Funds Corporate Ownership by Pension Funds: 1955-1983 YEAR Percent of Corporate Ownership Attributable to Pension funds EQUITY BONDS 1950 .9% 13% 1955 2% 24% 1970 7% 39% 1975 19% 42% 1984 23% 50% 1990 estimate 30% 49% Source: Richard Ippolito, Pensions, Economics, and Public Policy, Dow Jones-Irwin, 1986, p. 124 Table 7-4 from less than 1 percent in 1950 to 23 percent in 1984...

...All employers would be required to have a pension fund and contributions would be a minimum of 3 percent of salaries...

...Pension fund strategies expose corporate dependency on labor's capital...

...industrial mix, and growing inequalities of income and wealth require economic planning and control over global speculation and capital mobility...

...Unions generally have not challenged the limitations of this narrow focus...

...Pension funds are the major stockholder and lender to corporate America...

...An estimated $230 to $500 million has been directed into real estate projects by building trades investment financing foundations since the late 1970s...

...pension funds were willing to buy their shares (issue credit) without the firms having to raise the dividend or market valuation of their companies' issues...

...Banks and corporations have adversarial relations—banks impose conditions and restrictions on corporate borrowers...

...In Finland, the private capital industry is a key component of Finland's management of its "social capital fund...

...But, in exchange, GM was allowed to move more pension assets under its control...

...In the late 1970s and 1980s, funds available to firms in the stock market grew, in part, because the 1974 Employee Retirement Income Security Act (ERISA) required pension funds to be advance-funded (funds must be set aside to pay for future pensions...

...In 1979, the UAW achieved a historic agreement with the Chrysler Corporation...

...In 1950, pensions were primarily invested in corporate bonds and pension funds owned 13 percent of all outstanding corporate bonds...

...they argue that pension funds can be used to meet the employment needs of pension participants—with one important stipulation...

...Corporations have gained handsomely from the financial side of the employer pension system...

...If the control problem were solved, a boycott of the corporate parent's stocks and bonds would not necessarily affect a subsidiary's decisions...

...Labor could add a new twist to this mandatory pension scheme by proposing that these mandatory pension funds be invested in a social capital fund...

...The Industrial Union Department of the AFL-CIO has recommended that unions negotiate positions on the pension investment board of their single-employer sponsored pension funds—the Eastern Airlines Machinists were able to negotiate such a position in the 1980s...

...Moreover, these activities may stimulate legislative initiatives (say, under a Democratic administration) that would gradually disentangle pension fund control from the financial and corporate community...

...Corporations Corporations have three sources of funds: banks, corporate profits, and the stock market...

...It also poses a challenge to the labor movement— most pension funds cover unionized workers...

...Today, that steel mill is completely worker owned and is one of the most profitable in the industry...

...The building trades, in an effort to overcome waning ability to obtain contracts and conduct strikes, have increased the supply of mortgages and real estate development funds for uniononly construction...

...In using the ownership and control argument, labor becomes a defender of property rights...

...Much of unions' gains in corporate campaigns and boycotts may be due to the novelty of the tactic and corporations' lack of preparation for them...

...This short-term strategy and argument can be compelling...

...This exposure makes management anxious, weakening its bargaining strength...

...Pensions funds now equal 1.7 trillion dollars...

...The trustee, writing as a union member and part owner of Reeves, sent a letter to every Reeves employee asking her or him to vote for ACTWU...

...Obtaining investment capital from any of these sources has its drawbacks...

...The ACTWU organizer contacted the Texas UAW local that had a trustee on the Bell Helicopter Union Pension Fund...

...Perhaps the labor movement can extend that idea...

...ERISA also allows pension fund managers to move pension monies from stable, low yielding bonds to riskier and higher yielding stocks...

...All property is created socially, while owners are created legally...

...Industry-wide pension plans (generally created by collective bargaining) stabilize the supply of workers in competitive industries (such as trucking, the needle trades, and construction...

...The Pension Protection Act of 1987 limited some of these practices and, in turn, the rate of growth of defined-benefit pension plans is falling...

...2) portfolio information problems...

...After a protracted consumer boycott of JP Stevens products, in an effort to get a union election, the union uncovered the fact that JP Stevens shared a member of its board of directors with the Manufacturers Hanover Bank board...

...the threat of losing pensions added to the fear of losing one's job because of union activity...

...In the same family of efforts to correct failure in capital markets, unions in Colorado, New Mexico, and Arizona are establishing banks with union pension funds as initial deposits (similar to the labor banks of the 1920s) that are dedicated to serving the banking needs of low- and middle-income workers...

...If a certain investment guaranteed participants jobs but earned less than the market rate of return it would not be legal...

...There are a number of problems with the focus on ownership rights...

...Unions, by asserting the right to control pension funds, call on corporations to account for their use of pension funds...

...These pension-owning unions threatened to boycott the bank's services if that shared director did not leave the bank board, or JP Stevens did not allow an election...

...Moreover, the baby boom generation will swell the retirement ranks in the coming decades and, subsequently, will create pressure for an efficient and fair way to distribute pension benefits...

...Labor would gain influence in directing investment through its representatives on the board...

...Pension plans also serve employer interests...

...Labor's ability to control capital markets is restricted in three other respects: (1) the separation of corporate control from stock and bond ownership—especially in the case of subsidiaries and corporate parents...

...The building trades have come closest to challenging the appropriateness of using market rates of return in assessing the quality of an investment...

...Under such a mandatory system, unions would lose their advantages derived from privatized, and voluntary, social insurance...

...Union-sponsored legislation could require that a small percentage of each tax-exempt pension fund be pooled in a fund that is administered by a public board...

...Initially campaigns may succeed because of the shock value of union involvement in financial matters...

...Not only does an industry-wide union contract help standardize costs and reduce competition between firms, but a pension plan, in particular, helps each industry and firm retain skilled workers—workers with employment-based pensions hesitate to leave their jobs...

...Labor's Strategic Use of Pension Funds So far, the labor movement's strategic use of pension funds has taken two promising, but necessarily limited, directions...

...In 1981, the President's Commission on Pension Policy (under President Jimmy Carter) recommended a mandatory pension system...

...However, despite the liberalization in pension investment law, which encouraged funds to hold more stocks, the risk-adjusted rate of return on pension funds since 1969 underperformed the market...

...Privatized social insurance helps a union survive...

...this further reduces management's relative bargaining power...

...Union workers have a service nonunion workers do not have—an agent who will negotiate for employer-based pensions...

...The second is offensive: The labor movement redirects investment from speculative and anti-union activity to productive and union-affirming activity...

...Several factors limit union success in using pension funds to influence corporate decisions...

...It doesn't have to remain one...

...The accompanying table shows one effect of this change...

...Employersponsored pension plans provide less than 10 percent of retirement income, but pension plans provide over 50 percent of the new funds available in the stock and bond market...

...Policy Directions The use of pension funds, not necessarily their ownership, is the key issue in pension fund reform...

...Increasing global competition, changes in the U.S...

...First, labor has lost most legal battles over ownership "rights...

...But labor must weigh these disadvantages against the benefits of a universal retirement income security program and the creation of a social capital fund...

...In 1986, ACTWU used pension clout to support a union election drive...

...Limitations of Property Rights Beyond these important, but limited, defensive and offensive tactics there is a need for long-run, systemic changes in the way labor's capital is invested...

...The labor movement, especially the building trades, has made important strides in its offensive use of pension funds—efforts that try to correct for general bias in capital markets: bias against small business, community development, and long-term stability versus shortterm profits...

...National unions and federations are attempting to meet challenges both of control and information...

...But, instead of bargaining for clauses that require fund managers to reallocate pension fund monies to ULLICO, the labor movement can support legislation that would require that pension monies be redirected into a particular fund dedicated to create employment and stabilize communities...

...Rights-based claims are the currency of American political action, but such a focus may obscure long-term goals to channel investment funds into projects that will provide wellpaying and secure jobs...

...But the Fortune 500 companies gained some advantage in this situation...

...Inc., composed of Bricklayer Union and Laborers' Union pension fund investment, which buys federally insured certificates of deposit (CDs) with small subsidies from participating unions from the US Trust Bank in Boston...

...The fact that pension funds are a source of investment funds has benefited corporations...

...ACTWU investigated the history and financial structure of Reeves and discovered that the Bell Helicopter Union Pension Fund owned 2 percent of its shares...

...And, in 1983, in Weirton, West Virginia, the non-AFL-CIO affiliated union at the National Steel Company, Weirton Steel Works, used the company's pension liabilities as bargaining leverage to negotiate an employee buyout of the firm in order to prevent its closure...

...What was once a mid-century advantage for unions is now, at the end of the century, a disadvantage...

...The employer-pension system originated in the late 1880s as a management device to ensure worker loyalty to the firm...

...Since the 1970s, the importance of employer pensions in providing income to the aged has paled beside the growing significance of pension funds in capital markets...

...Not only do pensions supplement an inadequate Social Security system, they also give unions an advantage in organizing...

...Although these defensive efforts are limited, they do aid unions in a traditional way...

...The first is defensive: The labor movement uses pension fund clout to achieve its traditional goals of contract negotiation and organizing...

...labor movement has also looked to its members' forced savings as a source of power...

...Calculating a genuine rate of return, one that would take into account job security and monetary rates of return, is a task yet to be undertaken...

...There are over ten thousand plans and the portfolio holdings of each fund can change daily...

...The pension fund management industry — bbaannkkss,, insurance companies, and money managers— would be an important constituency to reckon with and could be given a role in managing these funds...

...A side effect—not the unions' major motivation—is that this diversion helps fill a capital gap for housing...

...Second, shareholder activism works only if ownership does imply control, otherwise management can arrange differential voting rights and other protective strategies...

...Bad management and the fact that pension funds hold a disproportionate amount of Fortune 500 stocks—these stocks yielded less return than average—explain why pension funds performed (relatively) poorly...

...For example, if a subsidiary of a conglomerate refuses to recognize a local of one union, what can that local do...

...Manufacturers Hanover manages many union pension funds...

...The source of the funds can be traced to workers, but fighting over ownership rights avoids the real contest over just how pension funds should be used...

...Since May 31, 1980, over 13 billion dollars (almost 10 percent of all private funds) has been captured by corporations in pension plan terminations...

...Moreover, the Securities and Exchange Commission is considering corporate proposals to limit shareholders' rights to "be pests...

...These CDs finance construction loans for union-built, low-price housing for South Boston residents...

...In cases where union contracts do not disallow it, corporations can use their employees' pension trusts to fend off takeovers, to court "white knights," to buy the company's stock, and to terminate plans (which had more assets than legal liabilities) in order to use the extra cash...

...some types of profitable concerns are often bypassed by financiers...

...what was once a management tool is now viewed as a hard-won union victory...

...470 • DISSENT Pension Funds The second problem with basing control arguments on ownership rights is ideological...

...Shareholder activism and other forms of exposure and embarrassment are the usual tactics of most corporate campaigns...

...Today, however, unions negotiate strenuously for pensions...

...Over eleven projects across the country with varying arrangements and goals have pooled money from regional pension funds...

...The Service Employees International Union, the building trades, and the AFL-CIO, have been constructing data bases of union-controlled pension funds for the last eight years but the information-gathering problems are extensive...

...Other popular defensive tactics are the clean fund strategy, or ethical investing, and shareholder activism...

...These challenges diminish the assumption of corporate legitimacy as well as financial institutions' imperial control over investment decisions...

...The labor movement might consider a long-term strategy that integrates Social Security with employment-based, or occupationbased plans, such as the university professors' TIAA-CREF, or the building trades pension funds...

...Pensions are one type of property, evolving from American industrial relations and the specific policies of the state concerning the Social Security program and the appropriate mechanisms for capital accumulation...

...Corporations have almost always won the right to terminate plans and revert "excess" assets for their own use...

...This was a corporate campaign with a savvy twist—labor 468 • DISSENT Pension Funds used its position as capital owner to challenge the claims of traditional capital owners...

...The beleaguered U.S...

...In addition, revealing the link between workers and the nation's source of finance capital and credit strengthens workers' sense of their own economic importance...

...Profits are a contested terrain where shareholder dividends and management salaries compete with investment projects for shares of corporate profits...

...q FALL • 1988 • 471...

...The AFL-CIO, in 1980, urged its affiliates to bargain for a small percentage of their pension funds to be invested in the aforementioned ULLICO...