What do unions do to pension performance

Unions can have either positive or negative effects on risk-adjusted returns in pension plans. On the positive side, a union can improve monitoring of pension advisors and asset managers. On the negative side, the union may sacrifice returns by making investments that promote union goals. This paper discusses how the structure of the pension plan affects the union's ability and willingness to sacrifice returns to promote union goals. Using panel data on over 38,000 pension plans drawn from IRS Form 5500 filings between 1988 and 2008, we find the lowest petforming plans are unionized multi-employer plans. Among defined contribution plans, the underperformance of multi-employer union plans disappears when the pension is controlled by individual participants. (JEL J32, J51) I. INTRODUCTION While private sector unionism has declined over the past 50 years, union pension funds continue to be an important source of retirement savings in the United States. In 2009, collectively bargained private pension plans controlled approximately $1.5 trillion in assets and covered 31.6 million people. (1) Relative to the universe of private pensions, the collectively bargained plans cover 24% of the participants and 28% of the assets. Union leadership has a long history of encouraging its membership to leverage its control over these pension assets to promote union objectives. Unions encourage their members to invest pension assets in unionized companies and in projects or communities that employ union labor. More recently, union leadership has promoted the use of pension assets to initiate and support shareholder proposals for changes in corporate governance, and to pressure mutual funds on their proxy voting behavior. Some commentators oppose the use of pension funds to promote union goals, arguing that such activities reduce the risk-adjusted return on pension assets and violate the fiduciary requirements of the Employee Retirement Income Security Act of 1974 (ERISA). Union leadership argues that pro-union activities do not necessarily reduce risk-adjusted returns and could improve performance. (2) This study discusses the various ways that unions could either enhance or harm risk-adjusted performance and empirically investigates union effects. While prior research has focused on the effect of unions on pension performance, the most recent work is over 20 years old (Dorsey and Turner 1990). Since that study, the design of union and nonunion pensions has changed dramatically. In particular, there has been a pronounced shift from defined benefit (DB) to defined contribution (DC) plans. Also, among DC plans, participant direction has become much more popular. Our study discusses how these changes in plan design could alter the union's ability or incentive to sacrifice returns to promote union goals. Our empirical analysis of IRS Form 5500 filings over the past two decades shows that pension structure significantly alters the union effect on performance. While risk-adjusted returns are lower for multi-employer DB and DC plans, there is no evidence of a negative effect among participant-directed (PD) DC plans. II. BACKGROUND Unions have a long history of encouraging the use of pension assets to advance union goals. In June 1980, the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO) announced that labor unions should become more actively involved in the administration of pension fund activities. (3) This pension activism comprises a wide range of activities, including selecting trustees, investing assets in unionized companies, making loans to support projects that favor union labor, and exercising voting rights on stock owned by the pension fund. Opponents question the legality of such activities since the ERISA requires that pension fiduciaries manage a plan for "the exclusive purpose of providing benefits to participants" (Section 404(1)(a)). …