Plan Sponsors

May 1996

 

International ETIs

 

Launching a new targeted investment program for overseas union funds

 

Robert Stowe England

 

 

 

With economically targeted investments facing opposition in Congress and from private pension lobbyists, this would appear to be a strange time to think about exporting the concept. But Union Labor Life Insurance Company (ULLICO), a Washington, DC-based for-profit insurer owned by labor unions, is putting its resources behind an effort to help pension funds in other countries set up investment programs targeted at domestic job creation.

 

The program is part of a larger effort to help US unions guide development of union-owned pension, investment, and insurance programs in other countries. If successful, it is hoped this will strengthen the ability of unions around the world to help their members, create jobs, and gain leverage in negotiations with management. To facilitate the effort, ULLICO is planning to launch a new global investment company with two ETI funds investing in several countries.

 

In charge of the new international ETI effort at ULLICO, which has $6.4 billion in assets under management, is Michael Steed, senior vice president for investments and head of financial services. Steed oversees management of ULLICO's $2.5 billion held in commingled accounts for union members with life insurance polices. ULLICO also manages another $3.9 billion of third-party assets. "Almost all of that [$3.9 billion] is Taft-Hartley pension funds," says Steed. And ULLICO is in the employee benefit administration business through its Zenith Administrators subsidiary.

 

Steed says the international program is an outgrowth of the firm's own experience with domestic ETIs and a growing network of international relationships. ULLICO ventured into ETIs in 1977 when it created J For Jobs, a separate investment account allowing union pension plans to invest in mortgages and new construction that would create jobs for union workers.

 

The fund had grown to $738 million by the end of 1995, including $200 million from the California Public Employees Retirement System and the New York State Common Retirement Fund. Last year it generated a 14.05% return, and over the past five years averaged 9.18%. Commitments made last year totaled $252 million, which ULLICO says created 4.8 million hours of work for union members.

 

ULLICO's prime international tie is its relationship with the Hassan Fassy Institute in Rome. The institute was set up by US and foreign building-trades unions that exchange health and safety information between 40 countries in an effort to reduce job injuries. Robert Georgine, ULLICO's chairman, is also chairman of Hassan Fathy.

 

Georgine arranged an international conference in Rome on private pension systems in fall 1994. Many of the union leaders had never heard of defined benefit plans, defined contribution plans, or individual retirement savings accounts. Many of the countries represented had no private pension system, and in some cases their public pension systems face an uncertain financial future.

 

But some of the unions affiliated with Hassan Fathy-in Chile, Argentina, Brazil, Spain, Italy, and Australia, for example-have considerable political influence. Since the meeting, ULLICO has helped some of them develop legislation for private pension systems, including suggestions for tax-law changes that would benefit participants. As part of this effort it has also provided advice on laws that govern where a private pension plan can invest, both inside and outside the country. Steed says ULLICO has advised ERISA-style protections for new private pension systems.

 

Following ULLICO's advice, building and construction trade unions have influenced legislation setting up private pension systems in Spain and Argentina, Steed says. At the same time, ULLICO wants to see foreign unions set up insurance and investment companies like itself to manage pension funds for their own members. Like ULLICO, they would invest in government and corporate bonds and local equities. And they would have ETIs as an investment option.

 

Although they do not directly run pension plans, Argentine unions has alreday gone a long way in this direction. For example, the light and power union, Argentina de Trabajadores de Luz y Fuerza, owns 85% of a private investment company, Futura, which invests in ETIs. Futura has an interest in light and power stations and hotels.

 

In Spain, where the new pension system is closer to the US model, unions can have affiliated pension funds for their members. And legislation now being considered in Italy would create a private pension system including union-affiliated funds.

 

However, Steed emphasizes that ETIs must be prudent, diversified, and for the exclusive benefit of the pensioner. "If you have all those, you can then consider the collateral benefits," he says.

 

Steed has no fear that promoting ETIs in other countries might deprive unionized US workers of jobs. Since the bulk of ETI projects now being discusses in these countries are local construction projects, the vast majority would not be available to US workers anyway.

 

 A new global investment firm

 

To facilitate the ETI project, ULLICO is working with other businesses to set up a new company to manage targeted investments globally. The US and overseas partners that will capitalize this new venture are to include ULLICO, unions and union pension funds, other insurance companies, and private firms-none of the other names have yet been announced. As more of ULLICO's clients succeed in setting up union pension funds, the new company would then have ready-made ETI vehicles for them to invest in.

 

Steed says he expects the new international company initially will launch two global funds-hopefully by late summer, with $50 million to $75 million in assets. One will be a C Fund for construction, that will be similar to J For Jobs. In some countries it will take an equity stake in construction projects.

 

A second fund will invest in new industries. For this, Steed says ULLICO is hoping to draw on its success in more than a score of domestic private equity investments going back to 1992. One example he offers is Voight Aircraft, which was sold by LTV Corporation when the steelmaker emerged from bankruptcy in 1993. Voight had 10,000 workers, 5,000 of them organized by the United Auto Workers, making it a qualified investment. ULLICO put $5 million into Voight, and in return got a commitment from the new owners to ratify a collective-bargaining agreement with the UAW, Steed says. Two years later, Northrop bought Voight and ULLICO sold its shares to the acquirer, realizing a 75% gain, Steed says.

 

Last December, ULLICO launched another separate account, like J for Jobs, to invest in similar private equity deals-the Private Capital Account, or separate account P. It has so far attracted $30 million in investible assets from Taft-Hartley plans.

 

Both international ETI funds will seek local partners in each country where they invest, to help stimulate new construction and industrial development. Steed says the two funds will look for a superior rate of return-15% to 20% or better, he anticipates, based on ULLICO's estimates. Each project must either preserve or create unionized jobs or provide a benefit to unions and their workers.

 

The structure of the new global investment company, which will be headquartered in the US, is being reviewed by Hamilton Lane Advisers of Philadelphia, an alternative investments consultant, as well as by large national unions in Italy, Spain, Argentina, Chile, Australia, and several countries, Steed says. Details of the new company and the investment funds will likely be unveiled in June, at a meeting of the International Labor Organization in Geneva, but as yet Steed declines to say how soon the company will be set up and begin investing in new construction.

 

However, he expects it to make modest investments at first and establish a track record before it begins seeking larger sums. The growing appeal of international investments in the US will help to get the company off the ground, Steed says.