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Pension Funds

Think tank blames sustainable investing for CalPERS’ falling investment performance

Pension fund sees unfunded liabilities rise $27 billion in 2016 fiscal year

CalPERS' unfunded liability grew $27.3 billion to $138.6 billion in the fiscal year ended June 30, 2016, shows the most recent data for the pension fund contained in its June 30 annual financial report, posted on its website.

The data lags a year, marking the end of a 12-month period in which the $344.4 billion system had a 0.61% investment return compared to the 11.2% return for the fiscal year ended June 30, 2017. CalPERS officials have estimated the system is 68% funded as of June 30, a drop from 68.3% a year earlier and 73.1% at the end of the 2015 fiscal year.

Also, the California Public Employees' Retirement System, Sacramento, is also in the midst of a plan to lower its investment return assumptions to 7% from 7.5% by July 1, 2019.

A lower rate of return increases unfunded liabilities unless investment gains can cover the difference.

While it's unclear what the current unfunded liability is, one group is already using the higher figures against the pension system.

In a report released Tuesday, the American Council For Capital Formation, a business industry-backed Washington-based think tank, blames CalPERS' muted investment results over the last decade on the system's increasing emphasis on sustainable investing strategies.

"During this time of increased ESG investing and activism, the fund's performance has suffered, converting a $3 billion pension surplus to nearly $140 billion deficit over the past 10 years," the report says.

The report also says CalPERS should stop its practice on engaging companies on substainable investment practices and social and governance issues unless it show such practices are enhancing the company's value.

CalPERS earned a 4.4% annualized return over the 10-year period ended June 30 as it suffered through the financial crisis and stock market volatility, low fixed-income rates and the real estate meltdown, show pension plan statistics.

But the think tank report offers little evidence that CalPERS' ESG policy is to blame for the overall poor results. The council blames the overall poor returns partly on a failed green investment policy.

It cites four CalPERS private equity funds with a renewable energy/clean energy focus that were among the weakest performing of the 238 private equity funds CalPERS invested in for the one-year period ended March 31.

The funds are the Carlyle/Riverstone Renewable Energy Infrastructure Fund I with a -34.9% internal rate of return; Craton Equity Investors I, -19.9% IRR, Richardson Capital Private Equity Limited Partnership, -11.8% IRR; and the CalPERS Clean Energy and Technology Fund, -10.1% IRR.

But CalPERS' total investments in those funds combined is less than $650 million, according to CalPERS private equity reports.

Efforts to reach Tim Doyle, a former staff director for the House of Representatives Oversight Subcommittee and a author of the report, were unsuccessful.

The report also blames CalPERS' poor long-term returns on the 13-member board, which is made up of representatives of the governor's office, unions, state agencies, the state controller and treasurer. It cites the board's lack of investment experience and recommends that the system's investments be fully outsourced to outside managers.

CalPERS spokesman Joe DeAnda said in an email the American Council For Capital Formation report "cherry picked" its facts and noted the pension fund's overall $26 billion private equity portfolio had a 13.9% return in the latest fiscal year.

He said CalPERS remains committed to ESG investing and putting pressure on companies to have environmental, social and governance policies.

"We have successfully pushed companies to publicly report on the impact that climate change is having on their business, and we have successfully pushed them to open up their board selection process because companies with a diverse group of talented people on their boards perform better financially," DeAnda said. "We stand behind our efforts. Any suggestion that we stop engaging with companies on behalf of our members is laughable."