Federal Pension Balks at Bill Banning China Investments

Plan administrator says proposal discriminates against 5.8 million federal workers.

The Federal Retirement Thrift Investment Board (FRTIB), which administers a defined contribution plan for US federal employees, has balked at proposed legislation that would prevent the fund from holding direct or indirect investments in China-based companies.

The FRTIB oversees the Thrift Savings Plan, a tax-deferred defined contribution plan for federal employees that had approximately $560 billon in net assets as of the end of 2018. According to a letter seen by Reuters, the FRTIB said the proposed legislation “discriminates against 5.8 million employees, retirees, and service members by restricting their ability to direct their money and save for their retirement.”

US Sens. Marco Rubio (R-FL) and Jeanne Shaheen (D-NH) recently introduced the Taxpayers and Savers Protection (TSP) Act, which would prevent the FRTIB from directing federal retirement savings to China. The bill would conditionally ban the investment of Thrift Savings Plan funds in securities listed on mainland Chinese exchanges.

“It is well-known that the Chinese government uses state-owned and state-directed enterprises to control production, compete in global markets, and serve the Chinese Communist Party’s military, political, and economic goals,” said Shaheen and Rubio in a letter to FRTIB Chairman Michael Kennedy. “Many of these Chinese companies may soon receive investments directly from the paychecks of members of the US Armed Services and other federal government employees because of your decision.”

The bill would specifically stop the FRTIB from moving forward with a previously announced decision to shift the Thrift Savings Plan’s international fund index to the MSCI All Country World ex-U.S.A. Investable Market Index. It was this decision that prompted the proposed legislation by Rubio and Shaheen. The MSCI ACWI ex USA Investable Market Index (IMI) invests in large, mid and small cap companies in 22 developed markets, excluding the US, and 26 emerging markets. With nearly 6,400 constituents the index covers approximately 99% of global equities outside the US, including investments in Hong Kong.

The senators said the move to track the index “constitutes a decision to invest in China-based companies, including many firms that are involved in the Chinese Government’s military, espionage, human rights abuses, and ‘Made in China 2025’ industrial policy.” The implementation is slated for next year.

The senators said the index, or its sub-indexes, have included AviChina Industry & Technology Ltd., whose subsidiaries develop aircraft, unmanned aerial vehicles, missiles, and other weapons systems for the Chinese military. They also said that AVIC is a state-owned entity that the US Trade Representative has called “the sole domestic supplier of military aircraft” to the Chinese army.

The Thrift Savings Plan’s most recent financial statements indicate it already has nearly $41 billion invested in a similar fund. The plan has a fund called the I Fund that has $40.7 billion invested in a separate account that is passively managed and tracks the MSCI EAFE Index. The MSCI EAFE Index is an equity index which captures large and mid cap representation across 21 Developed Markets countries around the world, excluding the US and Canada. It includes investments in Hong Kong.

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