Transparency in Pension Funds: A Commutative Approach
Harry Cui
Abstract: Transparency in financial transactions in general and pension funds in particular, is vital according to the tenets of commutative justice. In contrast, opacity encourages information asymmetries and engenders substantial distrust and risk. This paper studies widespread opacity in pension funds. There is a lack of transparency in portfolio composition, and thus attendent risks,unanticipated feesincluding management fees, underlying fund fees, inactivity fees, contribution charges, exit fees, and platform fees. Current regulations have proved inadequate to increase transparency in pension funds and rules such as those found in the ERISA require updating and strenghtening.
Introduction
Transparency in financial transactions general and pension funds in particular, is vital according to the tenets of commutative justice. At its core, transparency enables fair exchange between two parties. It encourages timely, relevant and meaningful disclosure while fostering trust and good will. The undisclosed risks and hidden expenses in pension funds therefore, pose an ethical problem. Although the modern solutions of laws and regulations are effective, they are not without flaws.
Commutative Justice
The distilled concept of commutative justice may be presented as the idea of fair and equitable exchange between individuals; to give each person what she deserves – suum cuique.[1]The purpose of the maxim is to balance the interests of parties intending to exchange. The names by which to address commutative justice varies yet the principle unequivocally remains the same. Aristotle refers to a “special justice;” Aquinas a “particular justice;” Adam Smith a “commutative justice.” The methods we use to exchange goods and services have evolved beyond the age of the Greeks, but the ethical ideals of commutative justice still have relevance in the present commercial world.
Commutative justice is defined by four requirements: [2]
- A reflection of market price
The price of an item in exchange ought to, under commutative justice, reflect the market price. The requirements are not intended to be economic laws.[3]They are ethical blueprints which parties may use to conduct business fairly. As such, goods and services which have no inherent market value are not precluded. The first requirement additionally does not demand the assigned price of each good or service to mirror the market exactly as it is subject to economic and legal conventions. The convergence of the market and actual price should be the first step; however, it cannot be the only step. Commutative justice couples the values together in a presumption that both are equivalent. The prevailing market price is not always the fair value, particularly in the modern economy.[4]Due to the presumptive nature of the market price, the first requirement serves as a preliminary guideline for commutative justice.
- Appropriate exchange
Commutative justice requires an “appropriate” exchange. Appropriateness in an exchange is defined as whether the good or service could be contemplated to be a “sham.” A sham transaction serves no business purpose and adds no value.[5]It is created for the purpose of deception which contravenes the tenet of fair exchange. The deception is followed by the flow of “unjust incomes” from the purchaser to the vendor.[6]Trade derived from intentional misrepresentation is proscribed under commutative justice as it is an artificial and inappropriate inflation. Vendors pass the test of appropriateness if they do nothing to misrepresent or mislead the purchaser and vice versa. The principle of caveat emptor applies in cases of unabetted self-delusions. This could be contextualised under Adam Smith, who posits that “we may fulfil all the rules of justice by sitting still and doing nothing.”[7]Individuals are only culpable if they actively encourage sham transactions.
- Mutual advantage
The notion of mutual benefit is at the root of the purpose of trade. While the magnitude of both benefits is not required to be equal, commutative justice requires both parties to gain an advantage. Neither party should suffer a loss of wealth after the transaction as no party to an exchange intends to voluntarily lose wealth. Aquinas regards mutual exchange as a process whereby a “person should pay back to the other just so much as he has become richer out of that which belonged to the other.”[8]The calculation of wealth or the state of being “richer” is necessarily a subjective measurement. The values of goods and services and the advantage to be gained differs individually. For instance, the subjective value of a rare jewel to an appraiser likely exceeds the value of the jewel another. Exchange highlights the morality in personal transactions and individual preferences. Although mutual advantages cater to subjectivity, it does not supersede the other requirements of commutative justice.
- A balance of interests
The fourth requirement of commutative justice applies in situations of uncertainty. In any contract or exchange it is required that one party examines the interests of the other. A fair contract is “a contract that goes beyond the price arising from mere balancing of one’s own interests and strives for a fair balance.”[9]If one is faced with a moral dilemma and unsure about the application of the tenets of commutative justice, it is imperative to first examine the interests of all the contracting parties. The preliminary test for whether an agreement is equitable must be considered from the position of the other person. An agreement should only be concluded after bilaterally balancing the interests.
The principles of commutative justice are not esoteric ideas limited to philosophical thinking. They address the moral foundation of commercial transactions. Smith considers commutative justice so fundamental that he compares it to grammar.[10]Much like grammar, the applications of the rules should not be congratulated as it ought to be already deeply ingrained in our thoughts.[11]
[1]Plato. The Republic. 4.433.
[2]Koslowski, P. Principles of Ethical Economy. 2001. Page 186.
[4]Kay, J. “Fair value is not the same as market price.” Financial Times, 2013,https://www.ft.com/content/652040be-a5c4-11e2-b7dc-00144feabdc0.
[5]“What is sham transaction?” Business dictionary, 2019. http://www.businessdictionary.com/definition/sham-transaction.html.
[7]Smith, A. The Theory of Moral Sentiments. 1759. Page 73.
[8]Aquinas, T. Summa Theologica. 1485. Volume 3.
[11]Klein, D. Commutative, Distributive, and Estimative Justice in Adam Smith. 2017.
