U.S. Pensions Face Demands to Exit Russian Assets

But unwinding holdings—most of which are in index funds, not direct investments—is complex and could mean losses, as these assets are trading at deep discounts and liquidity is scarce.

U.S. politicians from New York to California are calling for public pensions to shed hundreds of millions of dollars in investments tied to Russia. So far, the retirement funds aren’t moving quickly to divest. In many cases, they can’t.

The funds have relatively small exposure to these assets, but unwinding them is complex and could mean losses, as they are trading at deep discounts and liquidity is scarce. Many of the largest retirement systems, which invest billions for teachers and other public servants, are adopting a patient approach.

“Considering that Russia amounts to about 2 percent of the global economy, whether a pension fund or other institutional investor would want to get out of an entire index fund in order to divest Russia holdings would be a questionable approach,” said Keith Brainard, research director of the National Association of State Retirement Administrators.

The California Public Employees’ Retirement System (CalPERS), the largest U.S. public pension, “supports the people of Ukraine who are suffering,” CEO Marcie Frost said in an statement.

But less than 1 percent of its $473.6 billion portfolio is in Russian-linked assets. Those include mostly stocks or index funds, as well as real-estate investments and private equity, worth in total about $900 million to $1.1 billion. The system isn’t taking precipitous action. Instead, it’s merely “monitoring current events and will take action as appropriate to protect the interests of our members,” Frost said.

The California State Teachers’ Retirement System (CalSTRS), the second-biggest U.S. public pension, said it too is closely following developments and will abide by relevant sanctions. CalSTRS said less than $500 million of its $319.8 billion portfolio is invested in Russia.

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Even if pensions did quickly dump Russia-linked investments, sanctions and illiquid markets have made selling a fraught exercise. Finding buyers, or even a venue in which to trade, has become difficult. And securities that do change hands do so at steep discounts. A $1.5 billion bond issued by Russian oil producer Lukoil PJSC—held by many of the biggest U.S. and European investment houses—plunged Monday to 39 cents on the dollar, from more than 90 cents less than two weeks ago.

Still, Russia-linked assets aren’t a major part of most U.S. pension portfolios, according to Orray Taft, a managing principal at Meketa Investment Group, which advises them on investments. Funds are unlikely to take immediate action, he said: “The sanctions right now are going to be what’s driving actions.”

A Few Funds Are Divesting

Despite stirring statements from officials, only a few pensions have exited Russian-linked holdings. The $61 billion Colorado Public Employees’ Retirement Association divested $7.2 million investment in Sberbank, according to Governor Jared Polis. That’s 0.01 percent of the fund.

“We cannot continue to provide financial support to a regime that so brazenly disregarded international law and launched such an indefensible attack,” Polis said in a statement Friday.

Georgia officials identified holdings in iShares MSCI Russia, an exchange-traded fund (ETF) that invests in a range of companies. The state plans to be fully out by midweek, said spokesperson Katie Byrd, who didn’t have details on the size of that investment.

“Most holdings of Russian assets by public pension funds are likely to be in index funds or other funds, rather than as individual direct investments, which makes it a lot more difficult to unwind,” said Brainard.

But some states are running for the exits nonetheless. Last week, the Pennsylvania Treasury Department, which directly manages nearly $40 billion, began selling off $2.9 million invested in Russian companies. They included mostly energy firms, with a few telecoms and banks, according to spokesperson Samantha Heckel. The state has completely divested from 28 of the 31.

Pennsylvania’s Public School Employees’ Retirement System said it too is reviewing its portfolio, adding that Russia- and Belarus-linked investments add up to $300 million, or one-half of 1 percent of its $72 billion portfolio.

Connecticut Treasurer Shawn Wooden, who is tasked with overseeing the state’s $47 billion retirement system, said he directed his team to divest the fund’s $218 million in Russia-domiciled stocks and bonds.

Others Are Still Considering a Change of Course

Many states have begun a flurry of portfolio-combing and course-recalculation.

California Governor Gavin Newsom’ s office is evaluating possible actions and policies. Legislators introduced a bill Monday that would require the state, CalPERS, and CalSTRS to divest from Russian assets, and would block state contracts for any company doing business with Russia.

Treasurer Fiona Ma, who sits on the boards of CalPERS and CalSTRS, said she supports divestment of Russian assets, as well as from local governments’ pensions.

Maryland Governor Larry Hogan directed agencies to review contracts, procurements, and holdings. Comptroller Peter Franchot, who chairs the pension system, called for divesting. The Maryland system has about $96 million in Russian investments, out of $69.3 billion in assets. That’s down from $197 million on February 18.

Washington Governor Jay Inslee said Monday that his state’s agencies must end contracts with Russian state companies or institutions. That said, the Washington State Investment Board isn’t changing its strategy, as it doesn’t have direct or actively managed exposure to Russian investments, according to spokesperson Chris Phillips.

Credit Raters’ Concerns?

In Massachusetts, a group of lawmakers led by Republicans is asking the state treasurer to dump Russia-linked assets, and Democratic State Senator Walter Timilty introduced a divestment bill. The $101.3 billion Massachusetts pension had about $140 million in exposure to Russia as of February 25.

Illinois and New Jersey lawmakers are proposing similar legislation.

On Sunday, New York Governor Kathy Hochul ordered a stop to state business and investments in Russia, and the $279.7 billion Common Retirement Fund is assessing its options. The same day, New York City Comptroller Brad Lander called for ridding five municipal pension funds of Russia-linked holdings. But that amounts only to $271 million, less than 0.1 percent of their $274 billion.

So far, credit raters aren’t concerned.

“We expect any changes to asset allocation to take time, and that the pension plans’ expected return and risk profile will be minimally impacted,” said Todd Kanaster, a director in S&P public finance.

Some state pensions, including those of North Carolina and Louisiana, have no plans to divest, saying their tainted holdings are minimal.

But even if exposure is small, symbolism is important, officials elsewhere said.

“Continuing to invest our state pension funds in Russian companies constitutes tacit approval of Russia’s deplorable actions,” a bipartisan group of lawmakers wrote Monday to Massachusetts’ treasurer.

Divesting “will send a clear message that the Commonwealth condemns Putin’s actions and supports the people of Ukraine.”

—With assistance from Skylar Woodhouse, Romy Varghese, Michelle Kaske, Dina Bass, Martin Z. Braun, Carey Goldberg, Shruti Date Singh, Shelly Banjo, Joe Mysak, Danielle Moran, Amanda Albright, Nathan Crooks, Vincent Del Giudice & Brett Pulley.

 

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