The markets giveth and the markets taketh away. This was one of those “markets giveth” years, to the considerable benefit of underfunded public pension funds. In a post going up soon, they also got a break from beneficiaries having the good taste to die sooner, but that does not yet seem to be reflected in their actuarial estimates.
However, CalPERS was a laggard, which does not reflect at all well on them. CalPERS is the envy of other public pension funds by virtue of having a large in-house staff and being able to afford consultants galore without incurring undue costs in relation to its fund size. It is big enough to further shave costs by running large in-house index funds and managing much of its bond investing internally.
So what gives? CalPERS is sure to try to blame all the scrutiny it has gotten, which has the causality backwards. CalPERS would not be the target of regular criticism if it had its ducks in a row. More specifically, CalPERS has a clearly unqualified Chief Investment Officer and a CEO who lacks a college degree and does not appear to have gotten much specialized training in finance, accounting, or economics to compensate for that shortcoming, certainly not enough for her to have attained any certifications.
Even more important, the weaknesses at the staff level are the direct result of a successful campaign by the former CEO Anne Stausboll to neuter the board. It’s simply perverse that state officials have allowed this to be the remedy for a pay to play scandal where the CEO, Fred Buerostro, was taking bribes and is now serving a four and a half year term in Federal prison. John Chiang is particularly culpable for enabling this power grab by staff, since who has held one of the two most powerful seats on the board since 2007, first as state controller, then as state treasurer, before the pay to play scandal was unearthed.
We’ve remarked repeatedly that CalPERS’ Sacramento sister, CalSTRS, puts the CalPERS board to shame. Its board is vastly more knowledgeable, far more engaged, and regularly challenges what staff tells them. CalSTRS proves that a more vigilant board does not hurt performance and is likely a contributor to CalSTRS’ better results.
Large U.S. systems that oversee retirement funds for police, firefighters, teachers and other public workers earned median returns of 12.4% in the fiscal year ended June 30, according to Wilshire Trust Universe Comparison Service. That is their best annual result since 2014.
Yet many of these public pensions remain severely underfunded despite the recent gains, meaning they don’t have enough assets on hand to fulfill all promises made to their workers. Estimates of their collective shortfall vary from $1.6 trillion to $4 trillion….
Even if returns remain elevated, large public pensions won’t be able to reverse their shortfall in coming years, according to Moody’s Investors Service. Large public plans currently have just 70% of what they need to pay future benefits to their retirees, according to 2016 figures from Wilshire Consulting…
The California Public Employees’ Retirement System, the biggest in the U.S., earned 11.2% in fiscal 2017—largely because of stocks and private equity. But the fund, known by its acronym Calpers, noted that it has just 68% of the assets it needs to pay for future benefits. That is up from 65% in 2016…
The California State Teachers’ Retirement System, which sits roughly one mile from Calpers in Sacramento, Calif., reported a fiscal 2017 return of 13.4%. The fund’s chief investment officer, Christopher Ailman, touted the number on Twitter as being higher than Calpers: “BOOYAH!!”
CalPERS will discuss its 2016-2017 fiscal results in more depth in its board meeting next week. The poor comparison with large funds generally and with CalSTRS is odd given that CalPERS ought to be able to invest at lower fee levels than others. In addition, it underperformed CalSTRS in private equity and fixed income. While CalPERS did beat CalSTRS in public equity, with a 19.7% return versus CalSTAS 19.6%, CalPERS has a heavier weighting in foreign stocks than CalSTRS. In a strong dollar year like last year, it should have done better. Similarly, CalPERS is so large an investor in private equity that it should achieve index-like returns, with some marginal improvement due to its size (fund managers often offer breaks on fee levels for larger commitments). However, in the last board meeting, a consultant from Wilshire pointed out that CalPERS has not taken up co-investing, another way to lower fees and potentially increase gross (and therefore net) returns anywhere near as much as it could have.
And apart from the falling short relative to CalSTRS, CalPERS also failed to meet its benchmarks. So it has a lot of ‘splaining to do. But given the giant pension funds’ track record, its beneficiaries are likely to get obfuscation instead.