CalPERS has missed out on as much as $3 billion in investment gains since the nation's largest defined benefit plan shed its tobacco holdings, as that industry powered ahead, a recent report from its consultant states.
That has the California Public Employees' Retirement System weighing whether to take up the habit again. Members of its investment committee on April 18 are expected to consider a plan that could allow the $291.2 billion system to reinvest in tobacco company stocks and other sectors that had been culled from its portfolio.
The potential reinvestment plan follows a report by CalPERS' general consultant, Wilshire Associates, Santa Monica, Calif., that said excluding tobacco stocks has cost the retirement system as much as $3.037 billion in combined investment gains between 2001, when the stocks were first removed from the portfolio, and the end of 2014. Like retirement systems nationwide, CalPERS is under growing pressure to capture investment gains as low interest rates bite into returns and an aging population increases demands for benefits.
Reinvesting in tobacco stocks, however, could touch off a firestorm, particularly because Sacramento-based CalPERS also is a major provider of health-care benefits. That could open the retirement system to criticism it is attempting to enhance investment gains while supporting products that endanger its participants.
“It would be like one part of the state throwing gasoline on a fire, while the rest of the state is trying to put it out,” said Stanton A. Glantz, a medical school professor who is director of the Center for Tobacco Control Research and Education at the University of California, San Francisco.
Mr. Glantz said reinvesting in tobacco stocks would fly in the face of California state policy to reduce tobacco consumption.
In explaining their thinking, CalPERS officials said the pension trust is separate from the system's role in buying or administering health insurance, and that they need to ensure they can pay retirement benefits.
“In my mind, in our belief statement and in our California Constitution, our obligation as the investment office is to consider what is in the best fiduciary interests of our beneficiaries,” CalPERS Chief Investment Officer Theodore “Ted” Eliopoulos said.
CalPERS' funding ratio is 76.3%, and in the fiscal year ended June 30, the retirement system posted a 2.4% return, 510 basis points below its assumed 7.5% rate of return.