The Financial Times made its interview with departing CalSTRS’ Chief Investment Officer Chris Ailman its lead story yesterday: Private equity should share more wealth with workers, says US pension giant. The Financial Times was too polite to say so, but Ailman could lay claim to being the best large public pension fund chief investment officer. CalSTRS, which manages the pensions of California teachers, is in the same general size league as its Sacramento sister CalPERS, and regularly outperforms CalPERS by a meaningful margin.
It’s hard to know where to begin with this. Limited partners like CalSTRS, who are, in Wall Street parlance, the money, have not even been able to get basic disclosures from the general partners like how much in total the private equity firms hoover out in fees and expenses, despite many years of pleading. Mind you, it’s a requirement for a fiduciary to evaluate the costs and risks of any investment, yet these investors have accepted this abuse.
Limited partners don’t get P&Ls of portfolio companies. They don’t get independent valuations even though that is considered to be essential for every other type of investment. So it’s ludicrous to think that general partners will share money with one of the very weakest parties in the picture, mere workers, when they won’t give information to the limited partners.
Someone new to this topic might wonder why limited partners don’t say “no”. The reason is they perceive private equity to be necessary for them to earn enough to reduce their level of underfunding, which in the public pension fund world is typically pretty bad. To make up for the shortfalls, pension funds like CalPERS and CalSTRS have also been increasing the amount they charge to cities, counties, and other local government entities. These pension costs are taking up larger and larger proportions of these budgets, creating concern and anger.
The California Public Employees’ Retirement System, the California State Teachers Retirement System and Genworth Financial Inc. revealed that some of their clients’ personal information was involved in a data breach that hit third-party vendor PBI Research Services’ Moveit Transfer Application, used by thousands of organizations.
PBI provides services to pension funds to identify member deaths so that proper payments are made to retirees and beneficiaries and to prevent overpayments or other errors. For life insurance firms like Genworth, the company helps identify the possible eligibility of beneficiaries for death benefits or for policies beneficiaries may not know exist.
According to CalPERS, while the data breach did not impact its information systems, it did impact the personal information of approximately 769,000 members, including retired members, some of whom are inactive members and may soon be eligible for benefits. The pension fund is offering free credit monitoring to retirees and beneficiaries with impacted personal information and is also mailing tips on how to protect their information. CalPERS is also providing information on its website and through its customer contact center.
Genworth declined to elaborate on its June 22 SEC filing, in which it said it was notified by PBI of the breach and that it “believes that the personal information of a significant number of insurance policyholders or other customers of its life insurance businesses was unlawfully accessed.” Genworth stated it is “working to ensure that protection services are provided to those impacted individuals” and that it believes the breach did not impact any of its information systems, including its financial systems, and that there has not been any material interruption of its business operations.
CalPERS and CalSTRS are two of the largest pension funds in the country (by both membership and portfolio size). As California Senate Bill 252, a bill calling for fossil fuel divestment from public retirement systems in California, continues to move along in committee, CalPERS and CalSTRS have publicly opposed the bill because it conflicts with their duties as pension plan managers.
The board set four initial measures for integrating the net zero strategy across the portfolio, with a specific focus on emissions reductions:
Interim science-based goal. Reduce greenhouse gas emissions across the investment portfolio by 50% by 2030, consistent with the latest findings of the United Nations’ Intergovernmental Panel on Climate Change.
Systematic decision-making process. Adopt processes to incorporate greenhouse gas emissions into investment decisions as part of traditional risk-and-return analyses and their potential impacts on the CalSTRS Funding Plan.
Reduced emissions. Target a 20% allocation of the Public Equity portfolio to a low-carbon index to significantly reduce portfolio emissions while managing active risk.
Integration of climate scenarios. Incorporate future climate-related scenarios into CalSTRS’ asset-liability modeling framework to help guide CalSTRS’ investment allocations.
These actions reflect increasing global momentum toward achieving a net zero economy. CalSTRS will review its net zero goals and strategy annually to adjust for the latest available data, market fluctuations and related scientific advancements.
“CalSTRS’ net zero pledge is rooted in its century-long promise to deliver a secure retirement for California’s hard-working educators and their families,” said Board Chair Harry Keiley. “Taking these interim actions to reduce emissions in our portfolio is a profound stepforward and underscores our commitment to considering the impacts of climate change fully and systematically as we manage our fund on every level.”
One criticism of ESG investing is that, when it shows good returns, this might be because of temporary factors that have an outsize impact. Such superior returns are often driven by climate-news “shocks,” declared Robert Stambaugh, a professor at the University of Pennsylvania’s Wharton School, and two other academics, in a recent paper. The reference is apparently to a spell of severe drought or destructive hurricanes. The professors expressed uncertainty as to whether any future ESG outperformance can be assumed.
Of course, with climate-oriented investing now a partisan issue, a welter of claims and counter-claims has appeared. To pro-ESG folks, science is on their side, hence the opposition is just blowing smoke to confuse people.
Anti-ESG politicians appear to be convincing the public that a “false equivalence” exists between their stance and the sustainability advocates, contended Witold Henisz, director of Wharton’s ESG Initiative, in a recent article in the Knowledge Wharton periodical. He wrote that “ideological opposition [is] cynically seeking a wedge issue for upcoming political campaigns — and, so far, it appears to be working.”
Whatever the outcome of the current debate over ESG-related bans and the like, the climate change question is not going away. Says CalSTRS’s Ailman, “It will be with us for the next 50 years.”
The California State Teachers’ Retirement System is now planning to formally define the term “diverse manager” and adjust their definition of “emerging manager.” Though the two categories overlap, they are not identical.
The term “emerging manager” is based on the following criteria, according to CalSTRS: “the amount of assets under management; fund lifecycle of funds; firm legal structure; non-employee ownership percentage; and other various factors including track record, private placement memorandum.”
The term “diverse manager” will refer exclusively to the diversity of the firm’s ownership. The term will be defined in a tiered way such that if a firm is 25% to 49% owned by women, ethnic minorities, and/or LGBTQ individuals, it will be labeled as “substantially diverse.” A firm would be labeled as “majority diverse” if it is more than 50% owned by women, ethnic minorities, and/or LGBTQ people. Ethnic minorities include all non-white groups listed on the census.
With big returns come big expenses. That’s what seems to be the case for pensions across the country, as they are forced to increase their payouts to beneficiaries due to inflation. While the past year has been a record breaker for pension fund returns, inflation will be claiming its fair share of the gains as well.
For CalPERS members, those who retired between 2006 and 2014 will receive the biggest increase at 4.7%. This will be the largest cost-of-living increase for beneficiaries in the past 32 years, dating to 1990.
While the Bureau of Labor Statistics has estimated the Consumer Price Index to have increased by 7% over 2021, CalPERS is not using the 7% to calculate its increased payments. Instead, it uses an average of each month’s numbers.
CalSTRS similarly also has built in inflation protection, thanks to a California law that requires public pensions to do so. However, CalSTRS’ method of calculating this payment is slightly different. The fund gives quarterly supplement payments to those whose annual benefit falls below 85% of their original benefit. This year’s inflation numbers will likely increase the number of supplemental payments that CalSTRS in forced to provide.
California’s climate-conscious policies aren’t matched by the investment choices of its largest public pension funds, according to a report from two environmental groups.
Of the 14 top U.S. pension funds analyzed by Stand.earth and Climate Safe Pensions Network, California Public Employees’ Retirement System, known as Calpers, and California State Teachers’ Retirement System, known as CalSTRS, were the largest investors in fossil fuel companies, with $27.1 billion and $15.7 billion, respectively, according to findings published Wednesday.
The two combined hold about half the fossil fuel assets for the entire group, according to the study. Calpers also came first in fossil fuel holdings as a proportion of its total assets under management, at 6.9%.
The New York State Teachers’ Retirement System had the second-largest share of its portfolio invested in fossil fuels, at 6.6%.
California’s two biggest pension funds have invested a staggering $43 billion in fossil fuel companies, and their opposition to divesting from the industry — including fighting legislation that would have stopped them investing in firms involved with the controversial Dakota Access Pipeline (DAPL) — has cost retirees and taxpayers billions, research shows.
The findings hammer home the fact that the divestment movement isn’t just about protecting the planet from the worst effects of climate change. With the oil, gas, and coal industries all on the decline, pension funds’ refusal to divest from fossil fuels is also endangering the retirement savings of teachers, government employees, and other rank-and-file public workers who have paid into these funds.
While it is common knowledge that fossil fuel stocks have underperformed the broader stock market, large bank stocks have been lackluster as well — including the banks that helped finance DAPL.
If CalPERS and CalSTRS had not opposed the original DAPL divestment legislation, they could have instead put pressure on the companies involved not to move forward with the pipeline, and such efforts might have been enough to stop the project, given the pipeline project’s turbulent history.
The California State Teachers’ Retirement System (CalSTRS) is now expected to hit full funding in 2041, five years ahead of last year’s prediction of reaching that level in 2046, according to a presentation from CalSTRS Deputy System Actuary David Lamoureux at the fund’s most recent board meeting on Friday. Additionally, board members anticipate that CalSTRS will hit 80% funding in 2024, 10 years ahead of schedule.
The timeline shift is due to the unexpectedly high 27% return CalSTRS earned in the most recent year. The CalSTRS board plans to release the excess funds from this year’s record return over the course of three years. This means that this year, only one-third of the excess funds will be used to alleviate the funded rate. “Because of that, our funding levels will improve, but they will improve slowly over time,” Lamoureux said at the board meeting.
Take the California State Teachers’ Retirement System (CalSTRS), which in February reported that it had its second-highest year for retirements in 2020, behind the fallout from the Great Recession. The pension fund reported a steep 26% jump in the second half of 2020 from the same time a year before.
When the pension fund for educators surveyed roughly 500 of these retirees, about 62% said they retired earlier than they planned. More than half said the challenges of teaching during the pandemic pushed them to seek an early out. Still, a CalSTRS spokesperson said this week that the fund does not expect the retirements to have a “material impact” on the funding levels.
Broadly speaking, any damage from early retirements is going to be “fairly muted,” according to Kevin McLaughlin, head of liability risk management for North America at Insight Investment.
The California State Teachers’ Retirement System (CalSTRS) recently reported a 26 percent increase in early teacher retirements in the second half of 2020 relative to the previous year. CalSTRS officials suggest that the COVID-19-driven spike in retirements will not affect the pension plan’s long-term solvency. But even if that holds true, CalSTRS is currently only 66 percent funded and has $100 billion in unfunded benefits. The costs associated with paying off this pension debt are skyrocketing and siphoning hundreds of millions of dollars from classrooms each year.
Like many states, California has made decades of legally ironclad promises to teachers regarding retirement benefits that, for a variety of reasons, have become massively underfunded. The most notable factors contributing to growing debt are underperforming investments, inaccurate actuarial assumptions, and politicians’ longstanding preference to spend money on sexier things than retirement plans. When a public pension plan accrues debt, states and school districts need to start paying down that debt in addition to covering the normal operating costs associated with pensions. While California’s ledger would indicate it has been making pension debt payments, CalSTRS funding has only gotten worse over the last decade.