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Editorial

Proposed pay equity restriction is misguided

A bill introduced into the California Legislature would restrict public pension funds making investments in alternatives asset classes to managers that have adopted and committed to comply with a gender and race pay-equity policy.

We applaud the intent behind the bill, but believe the legislation is misguided.

In these days of underfunded pension plans and expectations of low returns over the next decade, pension executives should not face undue restrictions on their investment opportunities. California is home to the nation's two largest defined benefit programs — the $349.3 billion California Public Employees' Retirement System and the $231.6 billion California State Teachers' Retirement System; each was less than 70% funded as of the 2017 fiscal year-end.

Institutions globally are moving further into alternatives. Among Pensions & Investments' universe of the largest 200 U.S. plan sponsors, defined benefit plans have increased alternatives investments dramatically. As of Sept. 30, 2017, this universe invested 8% in private equity and 7.5% in real estate. As of Sept. 30, 2007, those figures were 4.5% and 4.6%, respectively.

The bill would apply the restriction to new, additional or renewed investments. This might well backfire — on the pension funds. Instead of promoting race and gender pay equity at alternatives managers, the bill might result in pension funds being excluded from future funds by the best managers.

Perhaps the most famous example of such a move is that of venture capital firm Sequoia Capital, which in 2003 returned investment capital and asked at least two large public institutional investors — in California and Michigan — to leave its funds over state rules regarding disclosure of performance and portfolio holdings.

The bill does seem to offer plan executives an out when it states: "nothing ... shall require a public investment fund board to take any action that the board determines to be inconsistent with its fiduciary responsibilities." That is an issue, should this bill become law, for a pension fund and its counsel to figure out.

Anytime a pension fund's investment universe is limited — whether by individual securities allowed or by managers — the potential for harm to performance is great.

The bill may be heard in committee after March 18. It should not advance out of committee.