(December 19, 2011) — During the last decade, investment earnings at the largest public pension fund in the United States have been below the median among institutional investors.
In response to Wilshire’s quarterly earnings report showing below-median earnings by the California Public Employees’ Retirement System (CalPERS), the fund’s outgoing board member, Lou Moret, told CalPensions.com: “We are glossing over this, and it looks horrible.”
According to the news site, the outgoing board member stated that during his previous roles on the Los Angeles Fire and Police Pensions, money managers with earnings below the median for up to four quarters were dismissed.
“The California Public Employees’ Retirement System generated a total fund return of -7.0%, for the quarter ended September 30, 2011,” Wilshire’s analysis stated. “CalPERS’ Total Fund generated a return of -7.0% during the second quarter, modestly outperforming relative to its strategic policy benchmark, which returned -7.16%. Per Wilshire’s attribution, the System’s lower-than-target allocation to income (18.2% actual vs. 19.0% policy) and real assets (9.0% actual vs. 10.0% policy) were the largest detractors, given that these were the two major asset classes that posted gains during the challenging third quarter. On the active management side, good relative performance by the growth asset class…was the System’s main contributor.”
According to Wilshire’s report, CalPERS earnings during the last 10 years stand at 5.4% — a percentage that is slightly below the Wilshire median for large funds (5.7%) and lower than a broader Wilshire median for institutional investors (5.5%).
Earlier this month, a Stanford University-based economic think tank asserted that California’s public employee pension plans are facing long-term shortfalls as high as $500 billion. According to economist and former state Assemblyman Joe Nation, the report’s author, the shortfalls cost the state $3.4 million for each day that lawmakers fail to change the pension benefits and contribution levels for public employees.
Among the report’s findings for CalPERS, the California State Teachers’ Retirement System (CalSTRS), and the University of California Retirement Plan: “Using a ‘risk-free’ or low-risk discount rate — a method that is debated when experts talk about figuring out a pension system’s obligations — the total unfunded liability for CalPERS, CalSTRS, and the UC system is $498 billion. That’s up 17 percent higher than the $425 billion shortfall Stanford estimated in April 2010.”
CalPERS, however, claimed the study was an exaggeration.
“The study is written from a perspective that is intended to exaggerate perceived costs and the instability of pension systems,” said Ann Boynton, Deputy Executive Officer of CalPERS Benefit Programs Policy and Planning, in a statement released on the fund’s website. “The report’s findings were based on low discount rates to artificially magnify unfunded liabilities. It is important to remember that CalPERS invests in a highly diversified portfolio that includes stocks, real estate, and other assets that have historically earned significantly higher returns than the rates assumed in the study.”
Related article: Is the focus—and sometimes obsession—on assets under management when judging and predicting performance often erroneous thinking, reflective of a lack of logic? Many consultants think so.