Governance can make or break a pension fund's performance. That truism underscores why it's so critical to get it right, especially so for underfunded public funds when taxpayer money is at risk and promised benefits are on the line.
As the $411.5 billion CalPERS wrestles with the fallout from CIO Yu "Ben" Meng's abrupt resignation in August after his personal investments came under a state watchdog's scrutiny, CalPERS board members are trying to take back control. But CalPERS doesn't have a great track record here. The former CEO of the Sacramento-based California Public Employees' Retirement System was sentenced in 2016 to 4½ years in prison after pleading guilty to accepting bribes. Among prior incidents in recent decades, its former chief financial officer resigned in 2018, nearly a year after he was hired, after he reportedly misrepresented his earnings and previous work.
And therein lies the challenge. A pension plan needs investment staff that can be trusted to make sound, fiduciary judgments to meet return objectives. But with public employee money in play, it also needs board oversight. A public pension fund board needs to appropriately balance its prime oversight function with discretion to allow staff members to do their jobs.
Problems are more likely to ensue when there is a mix of political influence and board members who lack the requisite investment knowledge to fully carry out their duties.
Last month, the CalPERS board took back a role it had served before 2011 in which it shared with the CEO responsibility for hiring, evaluating and terminating the CIO. It also changed its investment committee back into a committee of all 13 board members.
A compensation committee has also directed the staff to do further research and return in November with a proposal to require its next CIO, as well as board members and some staff, to sell or use a blind trust for assets they own that give rise to a conflict under state law.
Case studies show that there is a negative relationship between fund investment performance and funded status in the U.S. and the proportion of board members who are either elected or ex-officio-appointed, Keith Ambachtsheer, Toronto-based president of KPA Advisory Services and director emeritus, International Centre for Pension Management in Toronto, told P&I. Canadian pension funds, in particular, are less politicized and end up with superior governance processes and financial outcomes.
At CalPERS, six of its board members are elected, four are ex-officio and three are appointed.
Bold changes are called for in revamping CalPERS' governance. Who will have the political appetite to take up the challenge?