Health insurance coverage

Forcing marginalized communities to compete

A researcher argues that pension fund managers have pitted vulnerable retirees against marginalized communities.

“If black women were free, that would mean everyone should be free,” declared the Combahee River Collective, a black feminist organization. The group the reasons that if black women were liberated from all injustices, it would necessarily mean that “all systems of oppression” had been dismantled.

The sentiments of the Combahee River Collective reflect a broader principle that marginalized communities should not improve their socio-economic conditions at the expense of other vulnerable groups. And yet, in the area of ​​pension funds, this seems to be exactly what is happening, according to a recent article by law professor Abbie Atkinson. Without structural reforms, pension fund managers stay “Free to commodify and profit from the plight of others.”

Atkinson specifically argue that pension fund managers have pitted vulnerable retirees against historically marginalized communities — including low-income communities of color — that disproportionately take on “risky debt.”

Risky debt understand “payday loans, small installment loans, student loans to attend for-profit colleges” and other types of high-interest loans. Brookings Institution researchers note that people of color more frequently count on risky debt — costing “up to $40,000 more” over a vulnerable person’s lifetime.

Atkinson argue that retirees have also become an economically vulnerable group, as pension funds – often a source of retirement income for “workers of modest means” – have increasingly placed the “risk of achieving a fully funded retirement” on workers rather than employers.

Although employers were previously required to pay fixed benefits – or specified monthly payments – after a worker retired under traditional “defined benefit” pension plans, today’s employers bear a “much lighter burden and very limited risk” under modern “defined contribution” schemes that only require employers to pay fixed contributions, not benefits, to workers. Accordingly, employees must to assure that they have enough savings for retirement, Atkinson notes.

But pension funds — which then invest employer and employee contributions —are chronically underfunded, making “crucial returns” higher to fund an employee’s future retirement. As a result, pension fund managers have increasingly account on “alternative investments, like marginalized debt, that promise higher returns, crucial to fund pension obligations,” Atkinson says. A recent study, for example, show that “75% of pension funds” are invested in risky debt.

Moreover, pension fund managers “have turned to private equity funds,” which then invest the pension funds in companies for high returns. “Private equity funds,” says Atkinson, “have sought capitalize on the borrowing needs and habits of the most vulnerable borrowers” ​​by investing in companies that profit from subprime debt. Private equity funds own “over 5,000 payday and online lenders” that offer high interest loans.

A study show that some private equity funds intentionally invest in for-profit schools, which depend on the marginalized debt of “disproportionately poor, minorities, single parents and military personnel” for profits. Since most for-profit college students receive federal aid, private equity funds benefit to through loans subsidized by the federal government.

Atkinson argue that, given the role of private equity funds in risky debt, the U.S. retirement system has “pushed ordinary workers, through their representatives, to secure their retirement well-being on the back vulnerable borrowers. As a result, the difficult financial conditions of marginalized communities have become a source of wealth for “retired precarious workers, another vulnerable community,” effectively pitting them against each other.

Because investors profit from a continuous supply of marginalized high-risk borrowers, Atkinson complaints that this pension system creates an incentive for investors to create harmful socio-economic conditions that force marginalized communities to engage in risky borrowing.

Atkinson dispute that regulators should prohibit pension fund managers from investing in marginal debt by expanding the fiduciary duties of pension fund managers. Currently, pension fund managers have legal obligations to maximize benefits for participants in their plan, and equity fund managers have limited legal obligations to funds that become their partners. But their homework require that they examine how their investments harm the public. To fill this gap in their legal responsibilities, Atkinson strong points proposals from other researchers that would require pension fund managers to account for the social impact of their investments.

Also, Atkinson argue that “private equity firms should be subject to increased oversight and regulation of their internal processes”. Currently, private equity firms are “subject to relatively minimal oversight” because they are exempt from mandatory disclosure requirements under securities laws, she explains.

The Securities Act of 1933for example, understand a “safe harbor” that allows private equity firms to “sell shares of their funds” to an unlimited number of investors without oversight from the United States Securities and Exchange Commission. Likewise, the Investment Companies Act 1940 exempt funds that sell primarily to “qualified buyers” – “which includes most pension funds” – from the requirement to disclose “information about the fund and its investment objectives”.

Legislative change, Atkinson points out, can increase regulatory oversight of private equity firms. Although the Investment Advisers Act of 1940 exempting private equity firms from disclosure requirements, the Dodd-Frank Wall Street Reform and Consumer Protection Act Shrunk this exception, requiring private equity funds to comply with the law “once they have at least $150 million in assets under management”.

Atkinson Noted that the Stop the Wall Street Looting Act– originally introduced in 2019 and reintroduced in October 2021 – would also require private equity firms to disclose more financial information about their funds, including the entities in which the fund has invested.

But the reforms are not enough, according to Atkinson. She highlighted that while reforms may reduce some harm inflicted by pension fund and private equity fund managers, “increased regulation would nonetheless circumvent the larger structural problems” that encourage them to pit “one vulnerable group against another in the name of wealth extraction”.

The US pension system, Atkinson laments, forces vulnerable communities to rely on market forces to achieve financial security, essentially asking the market to redistribute wealth. But individuals and entities in the market are only obligatory maximize their wealth through the most efficient means available. Consequently, they lack a “duty to consider the means by which that end is achieved,” argues Atkinson.

real change is not possible, concludes Atkinson, until society tackles the structures that force members of vulnerable communities “to rely on debt to survive and to have opportunities under the current welfare system.”