An emergency meeting of the California Public Employees’ Retirement System (CalPERS) board members will be held on Aug. 17 as state regulators examine whether CalPERS CIO Ben Meng violated state law with his financial filings.
Meng’s sudden resignation apparently stems from issues with his required state financial disclosure form. Officials said these filings show he did not disclose personal stock sales and that he had a potential conflict of interest by holding shares in three private equity (PE) firms that did business with the pension system.
The public forms for 2019 show that Meng allegedly failed to disclose the dates he sold 23 positions in stocks or funds. He had reported the holdings in an in initial financial form earlier in the year.
The disclosure forms also indicate that Meng had personal interests in the stock of three publicly traded PE firms that did business with CalPERS: Ares Management, the Blackstone Group, and the Carlyle Group.
Meng did not respond to requests for comment. It’s unclear if he recused himself from decisions to invest more than $1 billions in a Blackstone fund in 2020 and more than $300,000 in a Carlyle fund in 2019.
CalPERS’s ethics policy does not specifically prohibit investment staffers from investing in particular companies if staffers don’t make decisions revolving around them. Investment officers are encouraged, however, to invest in mutual funds and exchange-traded funds (ETFs), rather than individual stocks.
Blackstone and Carlyle are two of CalPERS’s largest PE general fund partners. The pension program had more than $10 billion invested in their funds.
The disclosure forms show that Meng owns shares worth between $10,000 and $100,000 in each of the three PE firms.
Meng’s disclosures on the financial forms were first reported on the blog Naked Capitalism on Sunday. Meng submitted his resignation three days later on Wednesday.
CalPERS Board President Henry Jones said in a statement that he has called a special meeting of the pension plan’s board for Aug. 17 to discuss personnel matters.
His statement came after California Controller Betty Yee, who sits on the CalPERS board, called for an emergency meeting.
“I am incredibly disappointed to hear about the former CIO’s lapse in both judgment and adherence to standard conflict-of-interest policies,” she said in a statement to Chief Investment Officer. “I have called for an emergency board meeting to discuss this situation, review these policies, the CEO’s oversight and implementation of these policies, and any additional safeguards necessary to ensure this does not happen again.”
The California Fair Political Practices Commission said it had received a complaint about Meng’s financial disclosures on Tuesday.
Jay Wierenga, the commission’s communications director, said that if the commission determines the complaint has merit, it will conduct a formal investigation.
Wierenga would not detail who filed the complaint. The commission examines conflicts of interest by public officials. State law allows the commission to levy fines of up to $5,000 per violation.
Jones said in his statement that the pension plan “has known about questions regarding Ben’s Fair Political Practices disclosure filings. These are private personnel matters and already have been addressed according to our internal compliance protocols.”
CalPERS board member Margaret Brown said in her own statement to CIO that she was concerned about Meng’s actions regarding his investment disclosures.
“Mr. Meng’s reported conflicts of interest and lapses in judgement are serious violations of his fiduciary duty to 2 million CalPERS beneficiaries,” she said.
Meng was working with investment staff Wednesday morning, but never came back to work in the afternoon, sources say.
CalPERS in a statement said that Dan Bienvenue, the pension system’s deputy CIO, will serve as interim chief investment officer. The statement said CalPERS will start an immediate search for a permanent successor.
The statement also quoted Meng as saying, “It’s important for me to focus on my health and on my family and move on to the next chapter in my life.”
Meng told the Financial Times: “My health has been deteriorating for six months.” He said that his sudden departure would allow a “quicker and cleaner transition” to Bienvenue.
Meng had only been at CalPERS for 18 months, joining the US’s largest pension fund ($409 billion in assets) in January 2019.
Before starting at the Sacramento-based pension program, he served as deputy CIO of China’s State Administration of Foreign Exchange. Meng, an American citizen who was born in China, was one of the top officials in charge of managing $3 trillion in foreign currency reserves.
Meng had worked at CalPERS before moving to China. He had served as its director of asset allocation. In February, he came under fire from US Rep. Jim Banks, R-Indiana, who contended Meng was too close to Beijing officials. Banks also decried the pension system’s investments in Chinese companies. CalPERS defended Meng.
Meng’s resignation comes at a difficult time for CalPERS. The pension plan only earned a 4.7% return for the 12-month fiscal year ending June 30, 2.3 percentage points short of the 7% return expected return CalPERS shoots for annually. In fairness, though, its performance is a lot better than most. Comparatively, public fund plans witnessed a 3.8% total plan loss year to date and a 1.9% 12-month return at the median, according to Northern Trust.
Meng, like his CIO counterparts in the US and globally, has faced a difficult environment over the past few months as the COVID-19 pandemic has upended the performance of stocks in a volatile environment.
Meng came up with a plan, approved in June by the CalPERS Investment Committee, to bolster returns by enhancing the pension program’s private market portfolio, leveraging up to 20% of the pension system’s portfolio, or $80 billion.
CalPERS has a more than $27 billion PE portfolio, but Meng wanted to increase that. He also wanted to make billions of dollars in investments in private debt, such as buying portfolios of bank loans to businesses that couldn’t get conventional loans from traditional banks.
The tactic, known as direct lending, has raised concern among municipal officials across California, whose cities, towns, and special districts have seen their contributions to the pension system increase to the point that some communities say they could be bankrupt within five years.
CalPERS is only 71% funded (measuring its ability to pay its beneficiaries), and the underfunding only stands to get worse.
CalPERS’s own investment consultants had concluded that the most the pension system could expect to earn on average over the next decade was in the low 6% range.
Meng had insisted his plan was sound and could help the pension plan earn its 7% goal, also known as the discount rate.
“Given the current low-yield and low-growth environment, there are only a few asset classes with a long-term expected return clearing the 7% hurdle,” Meng told the investment committee in June. “Private assets clearly stand out. Leverage will increase the volatility of returns, but CalPERS’s long-term horizon should enable us to tolerate this.”
Meng called his new approach the “Better and More Assets” plan.
The CalPERS Investment Committee approved the strategy by a 12-1 margin.
Pasadena City Manager Steve Mermell is one of many officials who had expressed concern about the new policy. In an Monday letter to CalPERS CEO Marcie Frost, he called it “risky and overly aggressive.”
While direct lending has resulted in returns of around 8% or better for many pension plans, there are concerns that the asset class could suffer severely with a rash of corporate bankruptcies, especially in light of the severe financial upheaval stemming from the pandemic.
Pasadena’s Mermell said the June 15 CalPERS Investment Committee vote to approve the measure came after only a brief public report from Meng. He said the details of the investment blueprint were discussed in a session that was more than five hours long and was not open to the public.
“While CalPERS is taking on more risk and struggling to meet the 7% discount rate objective, it is withdrawing from the public eye,” he said.
City of Pasadena spokeswoman Lisa Derderian said city officials had nothing against Meng.
“Our concerns are not about any particular person but rather organizational practices. We will continue to monitor developments closely,” she said.
Meng, during his 18-month tenure, was aggressive in making investment moves. He restructured the pension system’s external equity managers, firing most of them and moving most investing in-house.
Overall, CalPERS slashed allocations to external equity managers to $5.5 million from $33.6 million. Only three out of 17 external managers survived the purge.
Further, the pension fund restructured its emerging managers’ program, eliminating many minority- and women-owned firms that were underperforming. The allocation went to just $500 million from $3.6 billion. Only one out of the five emerging managers stayed on.
Ultimately, Meng may have been in an impossible situation, given the difficulty of achieving its 7% expected rate of return.
Former CalPERS board member and investment staffer J.J. Jelincic said Meng was put in a no-win situation, one also facing top investment officers at other pension plans. “Meng was given an impossible task to try and get a 7% return,” said Jelincic, forcing him to come up with the private markets plan. “He was trying to do what his bosses wanted.”
But it was the financial disclosure forms issue that apparently ended Meng’s tenure, Jelincic said. Ultimately, Jelincic said, the heat got for too hot for CEO Frost, resulting in Meng’s departure.
He said Frost was facing pressure from municipal officials upset with expanding the private markets program. At the same time, he said, Frost had to deal with Meng’s financial disclosure form issues.
CalPERS has a history of sudden executive turnover over the past several years. Deputy CIO Elisabeth Bourqui left the pension system suddenly in January 2019, just about seven months after starting and moving from Europe. She left shortly after Meng started.
Another top official, CalPERS Chief Financial Officer (CFO) Charles Asubonten left in May 2018, about seven months after he was hired. His departure followed disclosures that he had exaggerated his resume.