Wow, I took my eyes off CalPERS and managed to miss them trying to pull a fast one about their long-term returns. Fortunately, blogger W.C Varones caught it and Michael Shedlock promoted his find. And in an admission that Varones and Shedlock were correct, CalPERS removed the claims they deemed to be misleading…and substituted a different on that is just as deceptive.
And what has CalPERS done? Quickly edited its site to try to maintain the pretense that its return targets are achievable, when in fact we are in a “new normal” that is punitive to long term investors, be they pension funds, insurers, or individuals.
CalPERS has been on the defensive since it reported preliminary returns for its fiscal year just ended of 0.6%, when its target is 7.5%. Even though the final return is certain to be a smidge higher thanks to private equity doing well in the quarter where the data is not yet in, it’s clearly not going to change the overall dismal picture. Moreover, this result is particularly disturbing that governor Jerry Brown pushed CalPERS, to no avail, to lower its target to a somewhat more realistic 6.5%. The giant pension fund responded by creating a Rube Goldberg formula that (in crude form) will lower the target in years where performance exceeds 7.5%. With central banks locked in super low, and tending to negative rates, and any exit from those rates leading inevitably to large losses on assets unless one is heavily in cash (which CalPERS will never do), pray tell where where does this outperformance fantasy come from? For instance, fiscal year 2015-16 looks to be a last hurrah for bonds, with CalPERS having earned 9.29% in fixed income. But none other than bond maven Bill Gross has since warned that record-low bond yields “aren’t worth the risk.”
Here is the misrepresentation that blogger W.C Varones called out. From his post on August 1:
You probably know that CalPERS recently reported yet another year of investment results that fell far short of its absurd promises.
But did you know that CalPERS is actively, deliberately deceiving the public about its investment promises and results?
CalPERS has a section called “Myths vs. Facts” on its website where it tries to debunk critics of its rosy expected returns, which experts nearly universally believe are too high. Here’s what the site showed until mid-July:
This is a recurring theme of CalPERS propaganda: pay no attention to expert opinion, zero percent interest rates, or historically high valuations. CalPERS can always expect high returns because CalPERS earned high returns in the past.
After a second consecutive year of dismal returns, the statements above about 20- and 30-year returns are no longer true. This spreadsheet shows the past 21 years of returns, taken from CalPERS annual reports (we could not find data prior to 1996). CalPERS’ 20-year annualized return is now just 6.57%… and it’s about to go a lot lower because it is rolling off four more consecutive years of double digit returns from the tech/internet bubble.
Last year, CalPERS semi-acknowledged that it needed slightly less crazy assumptions, promising to eventually lower expected return… but only after it has a really good investment year first. That’s like a heroin addict promising to quit after just one more fix.
Given that the CalPERS “Myths vs. facts” statement was no longer true, we were curious to see what CalPERS would do after 2016’s bad results came in. And CalPERS did not disappoint:
Look what they did here. In mid-July 2016, after they had already reported 2016 results, they went back and cherry-picked time periods ending June 30, 2015. If we don’t cherry-pick the data, the truth is that CalPERS has missed its annual return targets for all of these time periods: 1-year, 3-year, 5-year, 10-year, 15-year, and 20-year — and the long-term returns are even worse than the recent years! CalPERS is deliberately misleading the public!
Yves here. Now CalPERS could have simply let this blow over, since Varones and Shedlock are mere unwashed bloggers, and there’s no evidence that the mainstream media, and in particularly, the California press had taken notice. As much as they are correct to point out that CalPERS is trying to pull a fast one, the statement on the CalPERS site is narrowly accurate.
But what did CalPERS do instead? Try to find another way to cut the data to fit its desperate need to claim its return assumptions are reasonable. This is what that section of the “Myths vs. Facts” page says now:
CalPERS has swapped one form of cherry-picking for another. Despite the effort to make “Total Fund” sound as if it’s an authoritative beginning, CalPERS merely found an excuse related to some sort of organizational. systems, or other change to select 1988. CalPERS was founded in 1932, so the selection of any date as a starting date for its entire portfolio results that is different than its regular 1,3, 5, 10 and occasional 20 year lookback is arbitrary.
And it’s easy to see why the choice of 1988 as a starting point would be particularly flattering. As of June 30, the stock market had not recovered from the 1987 crash as of June 30. For ease of getting the data, here’s the S&P 500 index value on July 1 of each year as a quick proxy:
CalPERS is also misleading beneficiaries and the public in communications that have much broader reach. In a Sacramento Bee op-ed, CalPERS board president Rob Feckner, in an op-ed that was almost certainly provided by CalPERS’ staff, tried to minimize CalPERS’ 0.6% return for fiscal year 2015-16 by contrasting it with the 18% return CalPERS achieved in fiscal year 2013-2014. Chief Operating Investment Officer made the same pitch in a short video on CalPERS’ website. But as the data cited by Varones showed, this result is not representative. If you look ever past measurement period that CalPERS has traditionally se, when the fundamentals were generally much more favorable than now, CalPERS hasn’t met its benchmarks. What basis does it possibly have for believing it will do better in the face of such big headwinds?
With its head-in-the-sand response, CalPERS is making it difficult even for those who believe in pension funds to defend them. The best solution societally for retirement savings is to have them funded federally, since the US is a sovereign currency issuer, and needs to deficit spend on an ongoing basis due to the fact that businesses chronically underinvest. Moreover, having the federal government provide for an adequate level of retirement income would align incentives much better, since officials would correctly come to regard retirement payments as coming out of the productive capacity of the real economy, as opposed to the confused focus on financial asset values (remember, a financial asset is always and every someone else’s financial liability, and will have the value you hope it will have only if the party on the liability side performs well over time). But if we are in a second-best world of inadequate Federal retirement payments, professionally managed programs are clearly preferable to individual plans. Cathy O’Neil gives one reason:
It’s actually, mathematically speaking, extremely dumb to have 401K’s instead of a larger pool of retirement money like pensions or Social Security.
Why do I say that? Simple. Imagine everyone was doing a great job saving for retirement. This would mean that everyone “had enough” for the best-case scenario, which is to say living to 105 and dying an expensive, long-winded death. That’s a shit ton of money they’d need to be saving.
But most people, statistically speaking, won’t live until 105, and their end-of-life care costs might not always be extremely high. So for everyone to prepare for the worst is total overkill. Extremely inefficient to the point of hoarding, in fact.
Instead, we should think about how much more efficient it is to pool retirement savings. Then lots of people die young and are relatively “cheap” for the pool, and some people live really long but since it’s all pooled, things even out. It’s a better and more efficient system.
Another reason, as any fan of John Bogle will tell you, is that institutional investors pay vastly less in fees and costs than retail investors do, and those savings make a huge difference in total returns over a 20 to 40 year time horizon. And that’s before you get to the fact that 401 (k)s have all sorts of nasty hidden fees.
But instead of calling attention to the real problem, such as the destructive impact of central bank policies on savers of all sorts, as well as the damaging impact of bank-favoring post-crisis policies on growth, CalPERS is trying to snooker its beneficiaries on the fantasy that the old normal is coming back. 25 years of post-crisis malaise in Japan, near deflation in Europe, and nearly a decade-long weak recovery in the US, with no reason to expect better on any front, should disabuse them of that notion.
What CalPERS is so cavalierly tossing aside is its reputation for professionalism and accuracy. While its staff and board may reassure themselves that they are winning the image battle with their unsophisticated retirees, they are losing the war in the wider world, particularly with the media. For instance, I’ve heard more than one journalist volunteer that the “CalPERS Responds” feature, in which CalPERS defends itself against even minor criticism in the press, makes them look ludicrous by being unduly reactive. CalPERS needs to admit that it has serious fundamental problem with meeting its return targets. The longer it pretends otherwise, the greater the self-inflicted damage.