Board approval would make the nation's largest defined benefit plan one of the first to forge a more limited role for consultants, said Russ Wermers, associate professor of finance at the Smith School of Business at the University of Maryland, College Park.
Mr. Wermers called CalPERS officials “courageous” for dealing with the potential conflict that could result from consultants wearing two hats — advising both the staff and the board on the same investment issues. “This is a very good and progressive idea,” he said. “I expect other pension plans will eventually follow CalPERS' lead on this issue.”
CalPERS is actually behind the curve compared to the $152.9 billion California State Teachers' Retirement System, West Sacramento. CalSTRS introduced a policy seven years ago that separated the role of board and staff consultants, said spokesman Ricardo Duran.
But the CalSTRS policy is more lenient than the proposed CalPERS one because it allows investment staff consultants to make their case before the board. “The staff consultants help develop strategies and plans for investment staff,” Mr. Duran said. “They may even go before the board to pitch why those plans should be followed. However, they do not advise the board in any way. That is what the general consultant is for.”
Separating the role of consultants, while well-intended, might not be realistic cost-wise especially for smaller plans, says William Atwood, executive director of the $10.7 billion Illinois State Board of Investment, Chicago.
“The idea of (multiple) consultants adds a whole new layer of administration and costs,” he said.
Mr. Atwood said he believes staff and board members can collaborate with consultants to make the best investment decision.
For CalPERS board members, the issue is consultant objectiveness. J.J. Jelincic, chairman of the investment policy subcommittee, said he is concerned about the board's general consultant also working for staff because the board doesn't know whether it's getting objective advice. “It reduces the ability of the board to monitor staff investment decisions,” said Mr. Jelincic, who is also an investment officer in CalPERS' real estate division.
Executives at PCA, the firm most affected by CalPERS' planned policy. say they approve of the move. In an April 11 unsigned letter to members of the CalPERS investment policy subcommittee, PCA said it supported the objectives of the new policy and believe that its adoption will “enhance focus and accountability for both staff and consultants.”
But the letter also stated there will be disadvantages. “The tradeoff is that, with less involvement in staff activities, the board consultants are likely have less informed insights into ongoing investment processes, manager selection, adequacy of resources,” it said. These are all areas in which the board consultants are expected to keep the investment committee apprised, the PCA letter added.