The Growing Relationship Between the US Defence Industry and Pension Funds
Over the years, the United States (US) defence industry and US pension funds have become increasingly intertwined, with many pension funds holding significant investments in defence companies. This close relationship between the defence industry and the pension funds has raised concerns about the potential risks to both sectors in the event of an economic downturn or other financial crisis. There is an ethical dimension to it, too.
The US defence industry is a critical component of the country’s national security apparatus, with billions of dollars spent on defence spending every year. Defence contractors, directly and indirectly through sub-contractors, employ millions of workers across the country and provide critical goods and services to the military and other government agencies. As such, the health of the defence industry is essential to the country’s overall economic and national security.
At the same time, retirement funds, including pension funds, are a crucial part of the US financial system. They provide a reliable source of income for millions of retirees and support the broader economy by investing in a wide range of industries and companies.
However, the increasing investments of retirement funds in the defence industry have raised concerns about the potential risks to these funds in the event of a downturn in the defence sector. If the defence industry were to experience a significant decline, it could negatively impact the value of stocks held by pension funds, potentially leading to significant losses for retirees and other investors. With so many conflicts and wars going on around the world, including Russia’s invasion of Ukraine, a heightening tension between the US, its allies and China this may not necessarily be the case in the foreseeable future.
Moreover, the close relationship between the defence industry and the pension funds has also raised concerns about potential conflicts of interest. Many pension funds are invested in defence companies that also receive significant contracts from governments. This close relationship could potentially lead to a situation where the interests of the defence industry are prioritised over the interests of retirees and other investors.
In terms of pension funds that invest in the defence industry, it varies widely depending on the country, the specific pension fund, and the investment strategy of the fund. In the United States for example, the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS) are among the largest pension funds that invest in the defence industry. According to a report by the International Campaign to Abolish Nuclear Weapons (ICAN), CalPERS held shares worth over $3.3 billion in 18 of the world’s largest nuclear weapons producers, including Boeing, General Dynamics, and Lockheed Martin. CalSTRS has also been reported to have significant investments in defence contractors, including Lockheed Martin and Northrop Grumman.
Several pension funds in the United Kingdom invest in the defence industry, including the Universities Superannuation Scheme (USS) and the Pension Protection Fund (PPF). The USS is one of the largest pension funds in the UK and manages the retirement savings of academic and administrative staff at over 350 universities and colleges across the country. According to its latest annual report, the USS had investments in several defence companies, including BAE Systems, Leonardo, and Rolls-Royce.
The PPF, which was established by the UK government to provide compensation to members of defined benefit pension schemes when their employer goes bankrupt, also has investments in the defence industry. According to its latest annual report, the PPF held investments in several defence companies, including BAE Systems, Airbus, and Leonardo.
In Canada, the two largest public pension funds are the Canada Pension Plan Investment Board (CPPIB) and the Caisse de dépôt et placement du Québec (CDPQ). Both of these funds have invested in the defence industry.
According to public disclosures, the CPPIB held approximately CAD 500 million in Lockheed Martin as of 2021. The fund has also invested in other defence companies such as Boeing, Northrop Grumman, and General Dynamics.
The CDPQ has also invested in the defence industry, including holdings in Lockheed Martin, General Dynamics, and Airbus. The fund has also invested in other related industries such as aerospace and cyber security.
Pension funds in Germany have traditionally been hesitant to invest in the defence industry due to the country’s history and the general public’s negative perception of the industry. However, some pension funds have been reported to hold investments in defence companies.
For example, the Public Pension Capital (Versorgungsrücklage des öffentlichen Dienstes), which manages pension assets for public employees, has been reported to hold shares in Airbus. Deutsche Rentenversicherung, the largest pension fund in Germany, has reportedly invested in defence companies such as Boeing and Raytheon in the past, although it is not clear if they still hold these investments.
It should be noted that the level of investment by German pension funds in the defence industry is relatively low compared to other countries such as the US and the UK.
According to data on global military spending published on 25 April, 2022 by the Stockholm International Peace Research Institute (SIPRI), total global military expenditure increased by 0.7 per cent in real terms in 2021, to reach US$2.113 trillion. The five largest spenders in 2021 were the United States, China, India, the United Kingdom and Russia, together accounting for 62 per cent of expenditure.
In a Financial Times article published on 23 February 2023 and written by George Steer and Sylvia Pfeifer “Shares in defence companies have surged in recent months, eclipsing gains for wider stock markets, as investors bet on the promises of increased military spending by western governments to help Ukraine’s war effort against Russia. An MSCI global benchmark for the sector is up almost 30 per cent in dollar terms since the start of October, 15 percentage points more than the broader gauge of worldwide equities. Europe’s Stoxx aerospace and defence index has risen just over a third over the same period.”
To address concerns, some have called for greater transparency and accountability in the investment decisions of pension funds. This could involve greater disclosure of investments in the defence industry and other potentially risky sectors, as well as increased oversight by regulators and other stakeholders.
Others have called for more significant structural reforms, such as the creation of a separate pension fund for defence workers or the creation of a government-run pension fund. These proposals seek to reduce the potential conflicts of interest between the defence industry and the pension funds by creating more significant separation between the two sectors.
However, any structural reforms would likely face significant political and institutional hurdles. The close relationship between the defence industry and the pension funds has developed over many years and has become deeply embedded in the US financial system. As such, any efforts to reform this relationship would likely face resistance from powerful interest groups and other stakeholders.
From another perspective, the growing relationship between the US defence industry and pension funds raises several ethical implications.
There are concerns about the ethicality of investing in the defence industry, given the industry’s involvement in the manufacture of weapons and other military equipment. Some argue that investing in the defence industry is morally problematic because it contributes to the perpetuation of violence and conflict.
Second, there are concerns about potential conflicts of interest between the defence industry and pension funds. The fact that pension funds are investing in companies that receive significant contracts from the government raises questions about whether the interests of pension fund beneficiaries are being prioritized over the public interest.
Pension funds have a fiduciary duty to act in the best interests of their beneficiaries, and investing in a sector that is vulnerable to economic volatility and bears ethical contradictions could be seen as a breach of this duty.
Finally, there are concerns about the lack of transparency and accountability in the investment decisions of pension funds. Many pension funds do not disclose their investments in the defence industry or other potentially risky and questionable sectors, which makes it difficult for beneficiaries to make informed decisions about their investments.
Overall, the growing relationship between the US, UK and several other western countries’ defence industry and pension funds raises several ethical concerns, including issues of moral responsibility, conflicts of interest, and transparency.
We should ask ourselves if it is morally sound to invest in others’ peril for a peaceful retirement?