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Investment Preferences and Patient Capital: Financing, Governance, and Regulation in Pension Fund Capitalism Michael A. McCarthy, Marquette University Ville-Pekka Sorsa, Hanken School of Economics Natascha van der Zwan, Leiden University Abstract In comparative political economy, the patience of capital investment has often been explained with the political activity of stakeholders. Such scholarship attributes investment preferences to either set assumptions about what various actors are likely to want from their pension systems or to macro-level institutional factors. Comparing the preferences of business and labor actors in the occupational pension systems in Finland, the Netherlands, and the United States, we argue that preferences are better explained with a more dynamic view of preferences, one that emerges from meso-level institutional forces. We find that financing needs and capacities, governance capacities, and financial regulations explain changes in labor and business preferences with regard to fund investment. In each of the cases, a combination of these three institutional factors explains a preference shift toward more varied and more impatient investing. Keywords: financial regulation, governance, institutional work, patient capital, pension funds, pensions JEL classification: P16 political economy, G23 institutional investors Corresponding author: [email protected] Final version of this paper appeared in Socio-Economic Review, Vol. 14, No. 4 (2016). 1 1. Introduction Scholars of comparative political economy (CPE) understand the time horizon of capital as ‘one of the most significant determinants of variation between different types of capitalism’ (Estevez-Abe, 2001, p. 190). They associate capital that allows firms to conduct long-term business operations, often termed patient capital, with particular investment paradigms (Jackson and Vitols, 2001), particular groups of investors (Nölke and Perry, 2007), and particular types of macro-level politico-economic institutions (Culpepper, 2010). As a number of studies (Dixon, 2011; Estevez-Abe, 2001; Naczyk, 2013; 2016) have argued, pension capital is not inherently patient or impatient, but rather becomes patient or impatient through the political action of firms and unions. But while previous literature has correctly highlighted the importance of firms and unions, it pays scant attention to the factors that explain business and labor preferences with respect to the patience of pension funds’ investments over time. More often, CPE scholars have attributed set preferences regarding patient or impatient pension capital to business and labor actors in light of their financial interests (Gourevitch and Shinn, 2007), power resources over parent companies (Engelen et al., 2008), pension liabilities (Goyer, 2006), macro-level institutional positions (Wiß, 2015) or institutional complementarities (Amable et al., 2005; Deeg, 2007). We argue that institutional attribution of business and labor preferences is a more dynamic process than previous research suggests. We compared the occupational pension systems in three countries – Finland, the Netherlands, and the United States – to analyze the development of business and labor actors’ preferences over the patient and impatient uses of pension capital. We selected our cases with a diverse case study approach. On the macro-level, our cases represent different varieties of capitalism and types of welfare regimes: the first being social-democratic, second corporatist, and the last liberal (Esping-Andersen, 1999). The meso-level institutional design of the pension schemes also varies significantly. The Dutch fully funded occupational scheme is (quasi2 )mandatory and predominantly based on defined benefit (DB) plans, while the American scheme is non-mandatory and heavily reliant on defined contribution (DC) plans. The Finnish partly funded earnings-related scheme is a more centralized mandatory social insurance system with a homogenous DB plan. Despite these differences, the investment of pension capital is salient in all three political economies, since each has a mature occupational pension system characterized by a high degree of financialization in terms of accumulated assets (Ebbinghaus and Whiteside 2012). We observe similar, although historically varied and temporally uneven transitions in the nature and degree of patience and impatience in the investment practices of the three schemes. However, we do not find identical stances or actions regarding the preferences for patient or impatient capital between the key institutional actors of these schemes. Financial interests and development of pension liabilities offer only a limited explanation, as business and labor actors have demonstrated different preferences over im/patience in face of these issues. Institutional complementarities also offer little explanatory force, as evidenced by the different macro-level institutional contexts in which similar preferences were found in our three cases. On the basis of our analysis, we propose an alternative view to these explanations, one that focuses on the formation of actor preferences through meso-level institutional dynamics. Drawing on scholarship on institutional work (Lawrence et al., 2009), we analyze preferences as rationales and objectives of attempts of business and labor actors to institute, maintain and disrupt institutional structures affecting investment practices of pension funds. We identify three factors that have shaped business and labor’s preferences over pension fund investment policy over time: 1) financing needs and capacities, 2) governance capacities, and 3) the financial regulations set by the government. Together, they constitute the domains in which preferences regarding im/patience compete, and set the conditions under which business and labor actors define and change their objectives with respect to uses of pension capital. 3 In the following sections of this paper, we further specify and elaborate on our argument. In the first part, we identify different approaches to patient capital in existing scholarship on pension funds and CPE. We describe our theoretical framework for explaining the changes in the preferred form and degree of patience within each pension system (Section 2). We then show the investment trajectories from the post-war years until today in our three case studies and describe changes in the patient and impatient uses of pension capital (Section 3). We then describe and explain the key changes that have shaped the preferred uses of pension capital in each case (Sections 4-6). Finally, we will summarize our findings and suggest some avenues for future research (Section 7). 2. Pension Funds and Patient Capital As Deeg and Hardie (this issue) note, patient capital refers to equity or debt whose providers do not require asset managers to respond to short-term market pressures, but instead enable and/or promote the realization of long-term business and management strategy. In the Varieties of Capitalism (VOC) approach, patient capital is a key feature distinguishing CMEs from LMEs (Estevez-Abe 2001, p. 190). In CMEs, long-term bank financing, family ownership, crossshareholding among companies and – in some countries – government ownership and control of large firms are seen as key sources of patient capital (Peters, 2011). By the same token, scholars contrast the long-term liabilities of pension funds, which enable long-term shareholdings and bond investments, with mutual and hedge funds whose short-term optimization strategies represent the impatient capital of the ‘electronic herd’ (Goyer, 2006; Jackson and Vitols, 2001). Still, as Vidra (this issue) also shows, capitalist varieties do not necessarily cause im/patience. In scholarship on pension funds, patient capital is associated with the intentional use of pension capital to four different objectives: the provision of financing for long-term business 4 operations; economically targeted long-term investment; passive ‘anchor’ ownership; and active corporate engagement, aimed at promoting long-term management strategies. The first enables long-term business operations and provides them liquidity often, but not exclusively, through corporate bonds and loans (Estevez-Abe, 2001). Economically targeted investment consists of instruments directly seeking to produce dynamic economic effects that facilitate longer-term investment returns (Barber and Ghilarducci, 1993). Anchor ownership refers to passive loyalty-based ownership that promotes stability for the realization of long-term management strategy (Culpepper, 2010, p. 26). Such strategies may, for example, seek to shield core strategic investee firms from hostile takeovers. In contrast, corporate engagement refers to shareholder activism that pushes firms to adopt longer-term business strategies in annual meetings and governing boards (Carroll, 2012). Although there is no broadly agreed definition of impatience in the scholarship on pension funds, it can be defined as the opposite of the four strategies: financing for firms for other than long-term operations; investment in targets seeking short-term returns; ‘exit’ based equity investment strategies; and active corporate engagement to promote short-term business models. Recently, scholars have questioned the inherent patience of certain types of investors. Some argue that different types of investors can take the role of patient capital whatever the variety of capitalism (Dixon, 2011). Some observe that time horizons of institutional investment are influenced by the political and business interests that helped to create the investors in the first place (Naczyk, 2013). Moreover, institutional investments can have both patient and impatient uses. Pension funds can be patient in the sense that they invest in economically targeted ways but also highly impatient by investing in private equity funds associated with hostile takeovers or hedge funds with high turnover rates (Dixon, 2008). Similar critiques are raised regarding the use of bank capital in CME’s, which have become much less long-term oriented during the last few decades (Hardie et al., 2013). Macro-level political-economic 5 institutions seem to offer only a partial explanation for the patience of capital in the limited sense that they might empower certain institutional actors more than others in promoting their agendas (Naczyk, 2016). In short, recent research suggests that the extent to which patient or impatient uses of capital are put into practice depends on the realization of preferences held by actors occupying central positions in the pension system. While we broadly agree with these findings, we argue that they underspecify the causal mechanisms that shape institutional actors’ preferred uses of capital. Preferences regarding im/patience have been thus far attributed to set assumptions on institutional actors’ financial interests or interests in face of using power over parent companies of pension funds (Gourevitch and Shinn, 2007), pension liabilities (Goyer, 2006), macro-level institutional positions (Wiß, 2015), or institutional complementarities (Amable et al., 2005; Deeg, 2007). In this paper, we take a different position. We argue that the preferences over im/patience are contingent upon more dynamic historical factors. Our approach to im/patience is similar to Knafo and Dutta (this issue) and Van Loon and Aalbers (2017). By turning to the history we try to understand the context in which actors’ investment preferences are made. Drawing on scholarship on institutional work (Lawrence et al., 2009), we argue that actor preferences over patient or impatient uses of pension capital can be best identified by looking at the intentional attempts of these actors to institute, maintain and disrupt institutional structures promoting patient or impatient uses of pension capital. Our analysis is specifically focused on meso-level institutions (e.g., pension scheme design, organizational forms of pension funds, investment and solvency rules, norms and codes of conduct related to investment) and two sets of institutional actors: business actors (employers, business associations and central employer associations) and labor actors (employees, unions and central trade union organizations). Business and labor actors have long been recognized as the key institutional actors when it comes to occupational pensions (e.g. Ebbinghaus, 2011). 6 In our comparative study of Finland, the Netherlands, and the United States, we identify three institutional factors whose dynamics have shaped business and labor’s preferences over investment allocation: 1) financing needs and capacities; 2) governance capacities; 3) the financial regulations set by the government. We find a two-directional and cyclical relationship between preferences and institutional pressures in these three domains. We argue that business and labor will likely prefer more patience or impatience when such investment is perceived to provide higher returns than other types of investment at times when funding needs are high. But they can also seek to change the financing needs to maintain a preferred use of capital against other actors’ efforts. Similarly, business and labor are likely to push for patience or impatience when it offers channels for control over pension schemes, pension funds or investee firms. But they may also give up their own governance capacities or seek to decrease the capacities of other actors to maintain a preferred use of pension capital. Finally, business and labor may avoid promoting investment practices that might be interpreted as illegal or promote practices that improve compliance, but they may also seek to promote or maintain regulations that institute their preferred investment practices or prevent other actors from influencing investment. 3. Pension Investment Trajectories in the United States, the Netherlands and Finland The research on our three case countries show similar shifts in investment practices within occupational pension funds, most importantly a redirection of investment in predominantly patient long-term investments towards more varied and short-term oriented investments. More specifically, they are all characterized by a decrease of long-term bond investment and/or lending, complemented with an increased importance of impatient equity investment in investment portfolios. Moreover, we find that evidence from our three cases suggests that the capacity of pension funds to serve as patient investors has been limited in each of the cases. 7 The similarities between uses of pension capital in the three cases are remarkable considering the institutional differences between the welfare regimes and pension systems. In the United States, the shift toward less patient uses of pension capital occurred in the late 1950s, earlier than our other cases (see Figure 1). Nearly all pension funds established after the Great Depression of the 1930s opted for long-term and low-risk investment. In 1950, longerterm corporate bonds and US government securities accounted for 41.8% and 29.9% of fund assets, respectively. Alternatively, corporate equities only accounted for 16.4% of assets. Two decades later, however, asset allocations had changed considerably. By 1972, government securities and corporate bonds only accounted for 2.4% and 17.7% respectively, while corporate equities accounted for 73.8% of pension capital invested. Pension funds’ turnover rates with respect to equity investments started to increase in the 1970s with the embrace of more active management. Drawing on a sample of pension plans by using the Department of Labor’s Form 5500, researchers found that pension portfolio turnover between 1977 and 1983 typically ranged between 60 and 80 percent. Within the equities portion of the portfolios turnover increased from 30 to 40 percent in 1977 to 90 to 100 percent in 1983 (Ippolito and Turner, 1987). Since then, equities have remained the preferred asset class for fund managers, alongside growing investment in mutual funds and hedge funds with various types of short-term investment strategies (Preqin, 2015). Profitability and liquidity requirements and regulations drive investment decisions, which in part limits pension funds’ ability to promote economically targeted investment or ‘anchor ownership’ based on large-scale ownership in individual firms (Clark and Hebb, 2005). Moreover, only a small minority of pension funds have attempted to shape firm governance in active engagement, and often unsuccessfully (McCarthy, 2014b). 8 Figure 1 Asset Distribution of Noninsured Private Pension Funds in the United States, 1950– 1979. 100 90 80 70 60 50 40 30 20 10 Government Securities Corporate Bonds Shares Mortages Demand Deposits & Currency Time Deposits 1979 1978 1977 1976 1975 1974 1973 1972 1971 1970 1969 1968 1967 1966 1965 1964 1963 1962 1961 1960 1959 1958 1957 1956 1955 1954 1953 1952 1951 1950 0 Other Source: Authors’ calculations from Barth and Cordes (1981) As in the United States, the majority of the €1.2 trillion held by Dutch pension funds – around 42% – is invested in corporate equities. Unlike the United States, however, pension funds’ strong reliance on equity investments is a fairly recent phenomenon. Until the late 1990s, Dutch pension funds invested predominantly in fixed-income assets (see Figure 2). Following World War 2, Dutch pension funds provided investment capital to the rapidly industrializing economy through bonds and direct long-term loans with a maturity of at least 10 years. By 1960, pension funds accounted for 83,4% of total lending in the Netherlands (Goslings, 1998, p. 973). Besides forming a direct credit line to Dutch central and local governments (39% of total investments in 1960), pension funds provided capital to public and private enterprises in various sectors of the economy, most importantly banks and credit institutions (9%), 9 transportation (5%), public utilities (5%) and the metalworking industries (5%) (Verzekeringskamer, 1961). Figure 2 Asset Distribution of Dutch Pension Funds, 1960-2014. 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% Real Estate Mortgages Shares Bonds Loans 2014 2012 2010 2008 2006 2004 2002 2000 1998 1996 1994 1992 1990 1988 1986 1984 1982 1980 1972 1970 1968 1966 1964 1962 1960 0% Other Sources: Pensioen- en Verzekeringskamer, Financiële Gegevens Pensioenfondsen (Apeldoorn, multiple years); CBS, ‘CBS Statline’, online database, for years 2003-2014. From the mid-1980s onwards, these patterns began to change. The percentage of the portfolio invested in direct loans decreased rapidly, while investment in corporate equities rose. Dutch funds also began to invest in financial derivatives and alternative asset classes, such as private equity and hedge funds. Meanwhile, average turnover rates increased considerably, especially for equity holdings: from a typical 10-20% in 1965 to around 120% for company funds and 105% for industry-wide funds in 1994 (Boshuizen and Pijpers, 2000, p. 20-21). By comparison: turnover rates in long-term loans never exceeded 40% during the same period (ibid.). Finally, investments outside the domestic economy substantially decreased over time: 10 from 1% of total assets in 1980 to 20% in 1994 (CBS, 2016). By 2008, 76% of Dutch pension assets were invested abroad (ibid.). The Finnish trajectory includes a shift from long-term loan provision for domestic industrial production to actively managed, internationally diversified portfolios since the late 1990s. From the early 1960s, patient long-term lending accounted for over 80% of investment allocations. The main loans were the so-called premium loans, which typically had a maturity of ten years. Employers could borrow these cheap loans from the pension contributions they paid, or, more precisely, pay the contributions in bonds instead of cash. In analogy to German book reserves (Deeg, 2005), they provided working capital for long-term business operations and improved firms’ access to bank loans. Other main loans were investment loans, or economically targeted loans with long maturities of typically ten years. They were targeted to industrial production (ca. 50%), trade and trade infrastructure (ca. 20%), and the building sector (ca. 20 %). The degree of patience started to decrease in the 1970s due to demand-side factors. The average maturity of loans provided by pension insurance companies dropped from 10 to 6.5 years between mid-1970s and 1985 (Pylkkönen, 1996). A rapid shift towards investing in other instruments occurred in the 1990s. During the economic depression of the early 1990s, TEL funds first began to invest in government bonds, moving toward domestic equity later in the decade. Although turnover rates in domestic equity rose constantly until 2007 (The Finnish Pension Alliance, 2016), the Finnish funds have acted as anchor owners in their Finnish investee firms, while not engaging in active ownership elsewhere (Sorsa, 2013). Since 1997, new solvency and investment rules have gradually increased liquidity requirements and capped allocations to individual firms and asset classes, thus limiting pension funds’ ability to invest with long-term perspectives (Sorsa, 2011, p. 144159). Since 2000, Finnish funds have invested about one fourth of their assets in domestic equity, about 10-20% in foreign equity and actively managed hedge funds, and about 11 10% in real estate and real estate funds. The remainder has been invested mostly in various types of actively managed short-term funds and Western European and American sovereign and corporate bonds of highly varying maturities. Figure 3 Asset Distribution of Finnish Pension Insurance Companies, 1980–2014. Source: The Finnish Pension Alliance (2015) Notes: Assets are in book value for the years 1980–1996 and in market value from year 1999 onwards. Assets in the transition period of 1997–1998 are in estimated market values. 4. United States: From Risk Averse Investing to Early Impatience As noted above, prior to the 1950s, most American pension funds invested in patient, longerterm bonds. The cause of the shift toward impatience lay in the immediate postwar period. Widespread industrial conflict over the question of fringe benefits between 1945 and 1948 pushed the state to intervene with federal regulations concerning pension governance and investment. These reshaped business and labor actors’ preferences, many of whom in turn 12 promoted impatient pension investing within pension funds. After the war, American unions led the largest strike wave to that point with the primary aim being the incorporation of fringe benefits into collective agreements. The United Mine Workers, the United Steel Workers, and the United Auto Workers all took their members out on national strikes over pensions, which they not only wanted to be established but wanted an active say in governing and using in patient ways (McCarthy, 2014a). Organized business actively resisted this labor demand. As late as 1948, the National Association of Manufacturers advocated for the position that pension plans “must continue to lie outside the scope of collective bargaining” and the sole prerogative of management (NAM, 1948). These early conflicts between labor and management resulted in provisions being included in the Taft-Hartley Act of 1947 that bore on fund investment decisions. With regard to pensions, it makes it illegal for employers to contribute to a welfare fund established by a union. Businesses and conservative politicians worried that if unions were able to win governance over their funds, they would use them to undermine the American system of free enterprise. To weaken labor’s governance capacity, the act only allows contributions to funds that are either administered with or exclusively by employers – employer representatives had to comprise no less than fifty percent of the pension board of trustees (Fogdall, 2001, p. 219). As Taft (R-Ohio), one of the act’s authors, argued in Congress, ‘unless we impose some restrictions we shall find that the welfare fund will become merely a war chest for the particular union’ (ibid., p. 222). With unions the most vocal proponents of targeted long-term investing (Ghilarducci, 1992, p. 38), the law curtailed the possibility to use pension capital for more patient purposes. As a result, many unions dropped patient investment as a goal entirely. Unions like the United Auto Workers, once advocates, instead turned their attention to questions of financing. For many the issue of patient fund investment wasn’t raised again until the 1980s when unions began to revisit it as a means for domestic investment and shareholder voice. 13 By the mid-1950s, though, pension regulation drove both the preferences and fund investment choices to converge towards mainstream practices in American finance (O’Barr and Conley, 1992). Firms saw diversified equities-based investment as the solution to the financing problem that many funds faced. If such an approach would yield higher returns over the long run, as MPT predicted, then firms could contribute less to their pension obligations. TaftHartley afforded firms the capacity to govern solely on the basis of corporate financial considerations, through a plan fiduciary. As the National Industrial Conference Board pointed out in 1954, most companies ‘delegate responsibility for investments to corporate trustees and confine their own activities largely to the personnel aspects of their retirement plans’ (NICB, 1954, p. 10). Most fund managers simply followed financial industry practices when they allocated the assets in their funds, within the guidelines of financial regulation. While security was once thought to trump yield, this changed in the 1950s. When the New York State legislature enacted the prudent person rule in April of 1950, it gave common stock an ‘air of respectability’ as a legitimate class of assets to invest in (ibid., p. 13). With law being liberalized and MPT taking form, fund managers were spurred on to invest more heavily in equities. Though they started slowly, in 1954 most funds imposed a 25 percent limit on the amount available for stock investment, once the notion that risk could offset itself there was a ‘flood’ of money into equities (Clowes, 2000). While stock investment is not impatient per se, it did coincide with increasing turnover rates within the funds (Ippolito and Turner, 1987). In other words, it tended to be used impatiently. Despite impatience largely being the norm, some labor unions retained considerable hold of governance and promoted more patient approaches to investment. The majority of unions did not, such as the United Steel Workers and the United Auto Workers. These unions had single-employer plans, where one union bargains with a single-employer. However a minority of unions, like the United Mine Workers, the Teamsters, or many in the building and 14 construction trades, bargain in multi-employer plans. Here fund management is negotiated between several smaller sponsoring employers and a single, typically large, union. In the latter case, unions often shaped investment decisions, and as a result experimented with targeted and social investing well into the 1970s (McCarthy, 2014b). And by the onset of deindustrialization in the 1970s, the main labor organization, the American Federation of Labor-Congress of Industrial Organizations endorsed the idea of targeted investing for urban revitalization in areas of America’s rustbelt, in order to revive real levels of domestic investment, but never saw it put into practice (AFL-CIO, 1978). By 1974, new regulation, the Employee Retirement Income Security Act (ERISA), further promoted preferences in impatient investment. First, ERISA prohibits certain transactions between employee benefit plans and a plan sponsor. With regard to investing in the sponsoring companies own stock, becoming an anchor investment, the law prohibits the fund from having more than 10 percent of its assets invested in the sponsoring employer’s securities (Smith et al., 2009). This has greatly limited the ability of companies to increase governance capacity by self-investing. Second, ERISA undermined labor’s goals of more targeted investing by tightening the prudent person rule. The rule, which predates even TaftHartley, makes trustees invest for the sole benefit of the beneficiary, i.e. the future retiree. ERISA makes the key criteria governing investment choice the rate of return on investments; if social or other considerations are taken into account, they must be secondary. Third, investments are required to be diversified by investment vehicle type, geographic location, industrial sector, and dates of maturity (Blome et al., 2007). This means that an increase of patient investment requires a proportional increase of more liquid impatient investments. In practice, ERISA forced plan sponsors and fund fiduciaries to follow the best practices of Wall Street. This had meant investment in fixed longer-term bonds up to mid-20th century, but MPTbased equity investment afterwards. In a 1977 survey of more than 1,900 pension fund trustees 15 by the International Foundation of Employee Benefit Plans, 83 percent of plan fiduciaries said ERISA made them less willing to invest in anything but blue chip securities thanks to their high liquidity (International Foundation of Employee Benefit Plans, 1977). 5. The Netherlands: From Sleepy Institutions to Active Investors Unlike American pension funds, Dutch pension funds did not make the transition to equity investing and a globally diversified portfolio until the late 1980s. Long characterized as ‘sleepy’ institutions with little interest in active portfolio management, Dutch funds invested predominantly in fixed-income assets during the immediate postwar period, most importantly long-term bonds and loans, thus providing much needed capital for the industrializing economy. Pension funds also directly owned or provided mortgages for stores, residential housing and office buildings. The Algemeen Burgerlijk Pensioenfonds (ABP), the pension fund for government employees, held a special position in the Dutch pension landscape: under the auspices of the Ministry of Finance, the pension fund for civil servants became the most important purchaser of over-the-counter government debt (Fernandez, 2011, pp. 51-53). Through their investments, Dutch pension funds were thus deeply entrenched in the postwar domestic economy. The 1952 Pension and Savings Funds Act required pension funds to invest their assets in ‘a solid manner’, while single investment categories could not be excluded. The Act did not provide a substantive definition of the term ‘solid’, for this could result in ‘an unnecessary restriction of investment freedom’, according to the legislator (Kuiper and Lutjens, 2011, pp. 158-159). It was generally understood to mean something similar to the prudent person rule in the United States (ibid.), although this interpretation did not include a similarly strong rejection of social investing as in the United States. The solid investment rule therefore allowed fund trustees discretion to set their own investment policy. One source of patient capital, however, 16 was cut off. Under the Act, the provision of financing for the sponsoring firm was limited to 5% of the portfolio, effectively blocking the emergence of a Dutch equivalent of the Finnish premium lending system. This loose regulatory framework remained virtually unchanged until 2006, when the solid investment rule was replaced by a similar prudent person rule in accordance with EU Institutions for Occupational Retirement Provisions Directive 2003/41/EC. Financing needs and the expansion of governance capacities explain why both employers and unions shifted their preferences to variable equity investments over long-term fixed-income assets. Consensus on the suitability of fixed-income assets as a ‘solid’ investment of pension assets had vanished by the late 1980s and given way to a growing conviction among employers that MPT-based corporate equity investment offered more potential to achieve higher returns to fund growing pension liabilities (Van Gerwen, 2000). Dutch pension contracts promised final-salary pensions with intermittent cost-of-living-adjustments, making the size of employers’ contributions particularly sensitive to wage increases and macro-economic developments. To avoid ever-rising contribution rates and consequent perceived loss of legitimacy, high returns on investment were needed. As stock markets boomed in the 1980s, those who committed a larger share of their portfolio to the stock market, such as the Philips pension fund, saw their rates of return increase to record heights (ibid.). At the turn of the decade, many large Dutch corporations such as KLM and Unilever reduced or began to withhold pension contributions altogether. When the government fund ABP was privatized in 1996, its asset allocation quickly began to resemble those of other occupational funds. As pension investments became more complex, almost all funds outsourced asset management to external investment managers (Fernandez, 2011). Investment in corporate equities also helped solidify pension funds’ role in Dutch corporate governance. Until the mid-1990s, Dutch corporate governance was characterized by a stakeholder system. Under the so-called structural regime (structuurregime), large 17 corporations were required to install a supervisory board with large discretionary powers, yet limited independence from the managerial board, thus restricting the influence of shareholders over corporate governance. When development of financial markets spurred policymakers to reform Dutch corporate governance legislation in the mid-1990s, pension funds, together with other organized shareholder interests, campaigned to abolish anti-takeover defenses and preferred share ownership. In turn, large funds such as ABP envisioned a new role as active investors, who could form protective barriers against hostile takeovers while steering corporations towards better performance (Frijns et al., 1995). American examples, in particular the public employee fund CalPERS, provided inspiration for the new Dutch practices (Crist, 1995). Still, industry insiders maintained, such ‘anchor ownership’ should lack the confrontational politics of American activist pension funds, as they believed investors should not be involved in the day-to-day of business operations (Frijns et al., 1995). Union officials initially remained reluctant to support investment in corporate equity. They considered the stock market too volatile to wager workers’ pensions on. Its reluctance to accept investment in shares placed the labor movement in a difficult position. To maintain finalsalary pension schemes, pension funds needed to achieve either high investment returns or raise contributions. At a time of high unemployment, the latter option proved politically unfeasible. By the early 1990s, then, some unions began to use asset allocation as a bargaining chip in negotiations with employers. They agreed to lower pension contributions, provided pension funds invest more in corporate shares (NRC Handelsblad, 1992). As investment in equities increased, union federations CNV and FNV developed guidelines for their representatives on pension fund boards. Although the guidelines pushed for the consideration of social and environmental factors when investing, the organizations agreed with employers that investments should not jeopardize returns or place the fund in the position of activist shareholder, even in the case of labor conflicts (FNV, 2000). For that reason, FNV explicitly 18 rejected investment in activist hedge funds, stating that ‘[the] pension fund that invests in such hedge funds in fact becomes responsible for corporate policy. That is a role that pension funds should not aspire to in their role as investor’ (FNV, 2007, p.16). Investment practices by Dutch funds were thus supported by a relative consensus among business and union leaders on the desirability of employing pension capital for patient or impatient usage. Both sides hoped to achieve high investment returns by allocating pension capital to (what seemed at the time) high-performing asset classes, such as corporate equities in the 1990s and alternative investments in the 2000s, predominantly outside the domestic economy. Moreover, both business and labor actors explicitly rejected the idea of activist ownership on the part of pension funds, instead preferring a more passive role as proxy-voting shareholders. While almost all Dutch pension funds currently engage in proxy voting, only a small minority employs part of its portfolio to realize social or environmental value: 10% of funds invests in corporate equities for this reason, while a third invests in impact bonds (De Kruif and Van Ipenburg 2015). In the wake of the financial crisis, however, some shifts in the parties’ preferences can be witnessed. Both the Rutte Administration and Dutch employers have called on pension funds to invest in domestic investment projects, including real estate and infrastructure. Labor, meanwhile, seems to have taken a more assertive stance on pension funds’ role as investor: union federation FNV, for instance, is currently experimenting with the mobilization of pension capital in support of union campaigns and has called for the divestment from ‘locust’ private equity and hedge funds, whose aggressive short-term profit orientation jeopardize local employment. However, as many pension funds are experiencing deteriorating financial performance, profit orientation remains dominant. 6. Finland: From Long-Term Industrial Lending to Strategic Anchor Ownership 19 In the initial negotiations behind the TEL pension scheme in 1958–61, all main political parties and central labor market organizations had agreed that the lack of long-term financial capital was Finland’s main national economic challenge, which ought to be tackled with pension capital (Niemelä, 1994). Only the preferred forms of the pension scheme and patient pension capital varied. The main Finnish employer confederation regarded public ‘pension fund socialism’ a major threat and was able to convince right-wing parties and some unions about the benefits of a privately managed decentralized system. Thanks to the fragmentation and the weakness of the political left, the main blue-collar central trade union organization, the SAK, did not consider demands for public funds allocated to economically targeted investment realistic, and focused on promoting a mandatory pension scheme. The compromise was a partly funded social insurance scheme, whose investments were managed by different types of privately owned special-purpose funds selected and governed by employers. In order to get employers to cover full costs of the pension scheme, they were given a right to borrow two thirds of paid contributions directly as cheap long-term loans without collateral from pension insurance companies (PICs), or to use book reserves in a similar manner in company and industry-wide funds. The government decided to constrain investment to the asset classes it considered too risky with tight solvency requirements (Sorsa, 2011, pp. 140142). The demand for premium loans was overwhelming, accounting for about 50% of investment portfolios until mid-1980s (Hannikainen and Vauhkonen, 2012, pp. 409). Other investments consisted mostly of economically targeted investment loans guided by two policies drafted jointly by the PICs and central labor market organizations (ibid., pp. 414). The first was to prioritize investment targets that increase new, permanent jobs, enhance exports or conditions for exports, and help to rationalize Finnish industrial or commercial activities or improve the competitive position of Finnish businesses. The other one was that PICs could, with discretion, invest in housing projects that would complement the maturing pension system. 20 In practice, the latter policy was never adopted apart from few investments in governmentbacked housing projects in the 1970s and 1980s (Sorsa, 2011). There was a strong belief among the Finnish political and business elites in the late 1960s that premium and investment loans both promoted long-term real investment effectively. However, the blue-collar labor unions saw premium loans as an inefficient way to promote long-term investment, and called for major increase in economically targeted direct investment in the early 1970s. Employers did not approve any changes in the premium lending mechanism, but agreed to include representation of labor actors in the pension fund boards to avoid broader negotiations. Labor unions saw this as an opportunity to promote long-term investment in the future, as the volume of capital exceeding the demand for premium loans would become higher as the scheme matured. (Niemelä, 1994.) Ever since, central labor market organizations have become the main parties governing the scheme, including the design relevant laws and regulations, and have been consensually united against all government attempts to meddle with pension benefits (Kangas, 2007) or investment policy (Sorsa, 2011). During the severe economic depression of the early 1990s, nearly 40 per cent of all investment was allocated to Finnish government bonds to rescue the state from insolvency. While seen as necessary at the time, this was inconsistent with the central labor market organizations’ shared goal of enhancing private economic development. Awareness of the potential costs caused by ageing population also started to emerge at the time, and cutting pension costs became an overriding priority, as central labor market organizations considered it a key factor sustaining the legitimacy of the pension scheme as well as their role in its governance (Hannikainen and Vauhkonen, 2012). Financing needs also played a role in this shift. The main employer association had called for more profitable investments that would reduce contribution rates from mid-1970s onwards (Sorsa, 2011, pp. 142-143). The central trade union organizations came to share this view in the early 1990s after the social partners 21 had agreed that the future contribution rate hikes should be split evenly between employers and employees (Hannikainen and Vauhkonen, 2012, pp. 400-401). The central labor market organizations started to negotiate major reforms to introduce more profitable and internationally diversified portfolios in the mid-1990s, including changes in investment regulation and pension fund governance after the collapse of one mismanaged PIC, Eläke-Kansa. The central labor market organizations agreed that investments ought to be more subjected to market discipline, and their governance and supervision to financial interests of key stakeholders (Louekoski, 1996). The reform in investment rules promoted an equitydriven investment policy and required extensive diversification of equity portfolios (Hannikainen and Vauhkonen, 2012, pp. 428-430). While the representation of unions in pension fund boards was increased, the governance reforms of the 1990s gave the boards mostly a supervisory and strategic role. This increased the independence of a new generation of more short-term oriented portfolio managers recruited since the mid-1990s (see Sorsa, 2011). This also resulted to more active trading practices. For example, the earnings-related pension funds’ purchasing and sales volumes of domestic equity rose continuously until 2007 in absolute terms and in relation to overall assets, while pension funds have constantly increased their share of overall trading volumes in the Finnish stock exchange (The Finnish Pension Alliance, 2016). Patient capital also figured in the negotiations. In new conditions of open financial markets, employers were afraid that their capacity to govern Finnish firms would be questioned by impatient international capital, and strongly argued for the need of stable anchor owners that would enable shield from hostile takeovers. The trade unions shared this view because they believed that this was the best way to maintain the levels of domestic real investment (Hannikainen and Vauhkonen, 2012, p. 428). In the 2000s, Finnish PICs have become anchor owners occupying central positions in Finnish shareholder activism networks (Sorsa, 2013). For example, the PIC Varma first purchased major stakes in telecom operator Elisa and later 22 sold them to the Finnish government to prevent hostile takeovers by Icelandic investors (Turun Sanomat, 2008). This development has not been without ambiguity. The solvency and investment rule reforms of 2007 facilitated longer-term shareholdings, but those and later regulations also significantly constrained the number and volume of strategic anchor ownership stakes (Sorsa, 2011). The various social responsibility and ownership policy norms adopted by the pensions industry have been used to justify primarily symbolic ownership practices (Sorsa, 2013). Similar ambiguity applies to economically targeted investment. In early 2000s, social partners have discussed how real investment in Finland and in infrastructure investments could be increased. Yet, the moment the actual negotiations on reforms to promote these goals started, the entire theme was pushed aside and replaced with concerns of how the overall levels of profitability and liquidity could be increased (Hannikainen and Vauhkonen, 2012, pp. 435– 436). 7. Conclusion Our analysis confirms that pension fund investment is not inherently patient. Even though our cases have different types of macro-level politico-economic institutions and pension systems, they have demonstrated different mixes of patient and impatient forms of investment, whose types and degrees vary over time. We agree with recent research suggesting that neither the mixes nor the timing of their shifts can be explained adequately without addressing institutional actors’ struggles over investment policies. Yet, our analysis suggests that the preferences of institutional actors, in this case business and labor actors, cannot be attributed in an unidirectional manner to macro-level institutional complementarities or pension liabilities. Rather, preferences over im/patience are products of meso-level institutional dynamics. The preferred uses of capital have shifted in from large-scale provision of long-term loans or 23 corporate bonds to volume-wise limited passive anchor ownership and modest, sometimes symbolic, corporate engagement practices. We identified these preferences to be caused by institutional pressures related to financing needs and capacities, governance capacities, and regulative compliance. But these pressures are also the products of active institutional work efforts to institute, maintain or disrupt some uses of pension capital. In the United States, legislators imposed regulations that blocked labor attempts to use investments in more patient ways leaving most funds to firms that were primarily concerned with financing. This made the US occupational pension capital impatient early on and changed the preferences of many unions. Only in funds in which practices of patient investment are not clearly against the strong norms of fiduciary duty, or when unions have gained substantial governance control (like in public funds and multi-employer funds), has patient pension fund investment appeared. In the Netherlands, funds adopted a patient investment paradigm in form of long-term bonds and loans from the early 1950s until the 1990s. Strong competition between business and labor over the preferred forms of investment was absent, as both parties regarded long-term bonds and loans as the preferred and appropriate form of pension investment. But both parties also regarded impatient equity investment as the way to maintain control over the pension system and passive anchor ownership as a way to increase corporate governance capacities in the 1990s. In Finland, both employers and labor wanted to make pension capital produced by the mandatory pension system patient early on, but in different forms. Due to a favorable funding scheme generated by a political compromise, employers emerged as the winners by getting a legally enforced right to long-term premium loans, and maintained their preferred use of pension capital by compromising some of their governance capacity over pension funds. Impatience was introduced by a joint effort by the increasingly aligned social partners as a response to increasing financing needs and concerns over the legitimacy of paritarian pension governance. They also introduce a new patient use of capital to shield Finnish 24 firms from hostile takeovers with passive anchor ownership, by both sets of institutional actors. In contrast to the Netherlands, however, these developments also decreased governance capacities of business and labor actors. We suggest four avenues for further research. First, our study only addressed the institutional factors and dynamics that define preferences over im/patience in context of attempts to institutionalize them. Much more research is needed in order to identify preferences that are not expressed in public and the causes of why some actors are able to realize their preferences. Second, broader research, including comparative case studies, is needed to see if our findings are more generalizable. It’s unlikely that the factors that we have identified are exhaustive. Do they apply to other countries, pension schemes, or sources of capital? Do other factors also shape investment preferences? We expect that similar findings over occupational and mandatory earnings-related pensions can be made in a number of Western European countries including Sweden, Denmark, and Germany. But other factors may be discovered in these cases as well. Third, more detailed micro-level studies are needed in order to identify the scope in which meso-level institutional changes influence micro-level practices. This requires more ground-level views of the conditions under which investors change their preferences about patient and impatient investment, and the more nuanced shifts within different asset classes. 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