CalPERS Efficiency Drive Captures Nearly $1 Billion in Savings

Aiming to increase efficiency while lowering waste and redundancy, the nation's largest public pension fund has captured $963 million in cost savings in 2010, with an additional $287 million of savings targeted in 2011.

(May 25, 2011) — A staff report recently presented to the board of the more than $236 billion California Public Employees’ Retirement System (CalPERS) shows that the fund generated $963 million in cost savings in 2010 by increasing operational efficiency while reducing waste and redundancy.

“In recognition of challenging financial circumstances, we are aggressively looking at ways to reduce our operating expenses,” said CalPERS Chief Executive Officer Anne Stausboll in a statement. “Through innovations in our health benefits program, lower investment management fees, and other operational efficiencies, we were able to generate nearly $1 billion in cost savings last year. We expect to save another $287 million in the current year.”

The report shows that the CalPERS Investment Office reduced operational costs by $357 million in 2010, fueled by reductions in management fees charged by investment partners and managers. Additional efficiencies in investment operations are expected to produce $4.6 million in savings in 2011, the report showed.

Questions and skepticism about overly high and undeserved management fees have also gained attention in a February UK-based report by consultant Lane Clark & Peacock (LCP). The study, based on fund managers overseeing 80% of UK pension scheme assets showed that in the year to September 30, market performance alone accounted for an 11% increase in management fees. The report claimed returns were largely fueled by strong markets as opposed to superior skills, reflecting a misalignment over fees.

“Because assets grew as markets went up, managers have made a lot more in fees, even if actually they did not perform very well for their clients,’ said report author Mark Nicoll, who is also a partner at Lane Clark and Peacock. “Our research demonstrates that when markets rise, investment managers generally get paid higher fees even if they haven’t added any value. In our experience, pension scheme trustees will be better served by negotiating sensibly structured performance-related fees.”

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href=''></a>; 646-308-2742