NEW YORK (Reuters) - U.S. Senator Marco Rubio plans to introduce legislation to block the federal U.S. pension plan from investing in Chinese-listed shares, adding to pressure on administrators of the Thrift Savings Plan (TSP) to reverse a decision to allow one of its funds to track an index that includes China-based stocks.
Here is why Rubio cares about the TSP:
The TSP is a retirement savings plan, similar to a 401(k), for federal employees and members of the military that was established by Congress in the Federal Employees’ Retirement System Act of 1986. As of July 2019, the TSP held around $599.5 billion of assets belonging to its participants, who decide how much and in which TSP funds to invest.
The TSP is administered by the Federal Retirement Thrift Investment Board (FRTIB), an independent government agency managed by five board members appointed by the U.S. president, and an executive director, who are all fiduciaries. This means they are legally required to act solely in the best interests of the plan participants and beneficiaries. The FRTIB also consults with the Employee Thrift Advisory Council, which consists of representatives from the employee organizations, unions, and the military.
The TSP allows its participants to choose from several funds that hold a variety of assets, including Treasuries; both small- and large-cap U.S. stocks; corporate bonds, government bonds, and mortgage-backed bonds; as well as international stocks.
The TSP’s four index funds track benchmarks provided by Bloomberg, S&P Dow Jones Indices, and MSCI (MSCI.N).
WHY IS THE TSP SWITCHING THE BENCHMARK FOR ITS INTERNATIONAL FUND?
The TSP is legislatively required to select an index for its International Stock index Investment Fund, or I Fund, that is a “reasonably complete representation of the international equity markets excluding the United States equity markets.”
It hired Aon Hewitt Investment Consulting in 2017 to review the benchmarks its index funds track. Aon recommended switching the benchmark of the TSP’s I Fund from the MSCI Europe, Australasia Far East Index, which represents only 58% of the international equity market, to the MSCI All Country World ex-U.S. Investable Market Index, which represents 99%.
MSCI’s EAFE Index includes 21 developed market countries, while the MSCI ACWI ex USA IMI includes 22 developed market countries, similar to EAFE, but adds Canada, as well as 26 emerging market countries, including China, which has a 7.5% weighting.
In recent months, the TSP has become entangled in broader tensions between Washington and Beijing over trade and the role of Chinese companies in the U.S. economy.
Following pressure from Rubio, who said the TSP would be using U.S. retirement money to fund the Chinese Communist Party’s efforts to undermine American economic and national security, Aon did a review of its I Fund recommendation in October 2019 and came to the same conclusion as it did before.
MSCI has included China-based companies in its benchmarks since 1996, mainly gaining exposure to companies listed in Hong Kong or the United States, at the NYSE or Nasdaq exchanges. Since 2018, MSCI has included China onshore equities in some of its indexes, following an opening up of China’s markets. These companies include tech giants such as Tencent Holdings (0700.HK), but also some with government ties. Rubio has specifically cited the Aviation Industry Corporation of China [SASADY.UL], China Unicom (0762.HK), Hangzhou Hikvision Digital Technology (002415.SZ), and ZTE Corporation, as companies he does not think Americans should support.
MSCI has said it does not manage any funds, but aims to measure the performance of all eligible publicly traded equities in a given market.
Reporting by John McCrank; Editing by Michelle Price and Paul Simao