Threat of pension fund commodities ban in US lightens

Pension funds hit back at proposals to cap commodities exposures.

The chances of pension funds being hit by a ban on investing in US agricultural and energy commodities weakened this week when one of the Senators proposing the bill said she was concerned about the implications for scheme beneficiaries. Susan Collins, ranking member and former chair of the US Homeland Security and Governmental Affairs Committee, said she believed the influx of institutional money into commodities had a detrimental impact on prices, but added: “Pension fund managers are investing in commodities as the way to diversify their holdings, hedge against inflation and improve returns, all in keeping with their fiduciary obligations. In my judgment, an outright ban would have unintended consequences for retirees relying on these pension funds.”
The proposed bill, which could be put before Congress next month, was introduced by Collins and Senator Joe Lieberman in a dramatic bid to curb the “skyrocketing” of food and energy prices in the US. If passed, it would bar pension funds, US or foreign governmental entities, endowments or sovereign wealth funds with more than $500m in assets from trading commodities on a US futures exchange, a foreign exchange, or over‐the‐counter, unless engaging in a bona fide commodities hedging activity.The bill has already come under fire from US pension fund investors. William Quinn, chairman of The Committee on Investment of Employee Benefit Assets (CIEBA), which represents pension plans, said: “It is critical that pension plans have the ability to invest in accordance with modern portfolio theory and pursue the best investment strategy available. Our concern is both with specific restrictions on pension plan investments in commodities and with the precedent that action will set for allowing the government to intrude on pension investment decisions.”
The $500m cap has been proposed to counter index speculation, which the Senators said was generally unrelated to the changing fundamentals of supply and demand for physical commodities. Institutions, the committee said, favoured “buy and hold” strategies in which a percentage of their portfolio is automatically allocated to commodity markets, unlike traditional speculators who provide market liquidity by both buying and selling futures. The committee said assets allocated to commodity indices by “index speculators”, which it noted were predominantly pension funds, sovereign wealth funds, and university endowments, had grown from $13bn five years ago to $260bn. It said aggregate commodity prices had increased during the same period by more than at any other recorded period in US history.