Practical Applications of Reflections on Professional Ethics in Investment Management and Pension Fund Investment Consulting

Abstract

In Reflections on Professional Ethics in Investment Management and Pension Fund Investment Consulting, from the June 2022 30th anniversary special issue of The Journal of Investing, author John Minahan contends that the CFA Code of Ethics requires investment professionals to realistically address the problem of underfunded pension plans and rosy assumptions about future investment performance. Drawing on decades of consulting experience and recent interviews with investment professionals, Minahan says ethical dilemmas stem from gatekeeper issues (where a third party decides whether investment professionals have access to clients), industry cultural issues and associated ethical blind spots, and a “not my job” attitude among investment professionals toward fixing ethical problems.

According to Minahan, pensions ideally would fully fund the retirement income they promise retirees. However, the accounting standards used by pension funds systematically understate the size of their liabilities because such standards allow highly optimistic assumptions about future investment performance. Minahan asserts that the practice is misleading and contravenes the CFA Code of Ethics. In particular, the requirements 1) not to engage in misrepresentation, 2) to be loyal to clients, and 3) to promote the integrity of capital markets support the conclusion that confronting the pension liability problem is the responsibility of investment professionals.