Unexpected underperformance puts CalPERS on thin ice
By Paul Mackintosh - 23/07/12
One more sobering and alas, less surprising, recent piece of news is that the California Public Employees’ Retirement System (CalPERS), the 800-pound gorilla of pension funds, achieved just 1% return for its financial year ending 30 June, with assets falling from $239 billion to $233 billion. Its sister fund, the $151 billion California State Teachers’ Retirement System (CalSTRS), has just announced 1.8% returns for the same period. Both funds, according to the Financial Times, target annual returns of around 7.5%. CalPERS’s $34 billion private equity portfolio, incidentally, returned 5.4%; in CalSTRS’s case, the outperformance was 5.9%.
CalPERS’s latest figures highlight “pension benefits to 1,103,426 active and inactive members and 536,234 retirees, beneficiaries, and survivors.” California’s total population, by 2011 estimates, is almost 37.7 million. Even at the state level, CalPERS beneficiaries account for less than 5% of the population. Yet on this slender basis, a Titan of international asset management stands. And now California’s municipalities are seeking bankruptcy protection, and are unable to pay their liabilities to CalPERS.
If CalPERS, with all its scale and resources, cannot deliver better numbers, then what business has it sequestering so much wealth on behalf of so few people, who themselves could hardly have delivered worse performance on average if they had been free to invest it themselves? Yes, these are difficult times. But isn’t this when all that experience, all that power of scale, all those expensive consultants and premium access rights, should deliver, and produce differential outperformance? And just remember, in passing, that former CalPERS CEO Fred R. Buenrostro is awaiting trial alongside former board member Alfred Villalobos on a fraud charge brought by the Securities and Exchange Commission, allegedly concerning illicit placement fees to Apollo Global Management, while still facing separate corruption charges brought by the California attorney general's office.
Private equity itself is not directly tarnished by this failure of one of its largest and most influential backers – in fact, private equity pros can reflect that their end stood up in an otherwise dismal year. But those same professionals will find little comfort in the overall state of the global pensions sector. When its leading lights fail so conspicuously and err so grossly, the other people whose money they manage are likely to pull support and contributions out of the industry, with reason. Californians and everyone else deserve a better class of asset manager, and perhaps a whole new approach to superannuation support. With performance and corruption like this, the current system looks increasingly indefensible.