Roger Martin, Academic Director of the Martin Prosperity Institute at the Rotman School of Management and the world’s 3rd most influential business thinker according to the Thinkers50 list, has written a thought-provoking column over at the Harvard Business Review.
The premise of the column is that the largest pension funds are monopolistic entities – and although Martin doesn’t think they’re doing a bad job, he is worried that, like most monopolies in history, they will “slowly but surely gravitate to serving themselves, not their customers.”
Here’s a few excerpts from the column:
The top 350 pension and sovereign wealth funds control just under $20 trillion of assets. They are the largest holders of securities in for-profit organizations competing in democratic capitalist environments.
[…]
If one looks carefully at these holders of competitive, capitalist company securities, one thing jumps out distinctly: they are not themselves competitive, capitalist organizations. Virtually all of them share a single form: a monopoly enforced by government regulation. As a Canadian, I have no choice as to where the pension contributions that are legally deducted from my paycheck go. Whether I like it or not they are sent to the Canadian Pension Plan Investment Board. CPPIB is granted a monopoly right by the Government of Canada to serve me (except in Quebec, where the relevant and equivalent monopoly body is the Caisse de Dépôt et Placement du Québec).
The same rules hold in the home of the brave and the land of the free. California state employees, Texas teachers, and New York City workers have zero choice. They are served by government-regulated pension fund monopolies. In fact, 19 of the top 25 U.S. pension funds, with $2.1 trillion of assets under management, are government-regulated monopolies. The other six, with $500 billion of assets, are corporate-run monopolies in which employees have little or no ability to opt out.
Capitalism has broad support because of a general belief in the power of competition, free entry to industries, and customer choice to produce increasing productivity and high levels of innovation. However, the ownership of those actively competing companies is increasingly in the hands of organizations that face zero competition, no threat of entry, and have customers who are forced to use them.
Why is putting the economy in the hands of regulated monopolists a good idea? Obviously, many of those monopolists are doing a good job. I don’t begrudge sending my pension deductions to CPPIB because it is well run and does a nice job for me with my pension savings, and I have to applaud California Public Employees’ Pension Fund (America’s second largest pension fund with about a quarter of a trillion dollars of assets under management) for making the bold and brilliant decision to eliminate hedge fund investments from its holdings.
But the broad history of regulated monopolies is not inspiring. Without the forcing mechanisms of competition, entry, and choice, monopolies slowly but surely gravitate to serving themselves, not their customers.
[…]
If we really believe in competition and choice, then a big question we should all be asking ourselves today is what should be done about our monopolistic pension system?
You can read the rest of the piece here.
Photo by Dave Rutt via Flickr CC License