CalPERS walked back a policy that automatically reduced the $491.4 billion pension fund's expected investment return and its strategic asset allocation when actual investment returns outperform the expected investment return by at least 2 percentage points.
The revised policy approved by the board of the California Public Employees' Retirement System, Sacramento, on April 16 replaces the automatic expected investment return reduction with a trigger requiring the board to decide whether the pension fund’s expected investment return should be adjusted and its asset allocation changed in line with the new expected rate of return.
The automatic expected return reduction has been triggered once, in fiscal year 2021, since the policy was adopted in 2015. CalPERS earned a net return of 21.3% in fiscal year 2021, automatically lowering its discount rate to its current rate of 6.8%. However, the board had suspended the policy’s implementation between fiscal year 2017 and fiscal year 2021.
“This is a change that some of us wanted for a long time,” said Lisa Middleton, CalPERS board member and chair of CalPERS’ finance and administration committee, which voted to recommend the policy revision at its April 15 meeting.
The revision returns to the board the power to make these types of decisions based on “the facts on the ground at the time,” Middleton said.
“Most of us are always in favor of retaining that decision where we can,” she said.
Separately, the board in June could make changes to the performance metrics of its incentive program for fiscal year 2025. The board could also discuss, but not until 2025, revising its total fund performance approach to its incentive program to return to incentivizing investment executives based on the performance of the asset class in which they are involved rather than the total fund performance.
Global Governance Advisors, CalPERS’ board compensation consultant, in a recommendation to CalPERS talent committee April 15, said the pension plan has not placed any weighting on asset class investment performance since fiscal year 2020. Since that time, investment performance measures for staff bonuses have been based solely based on total fund results.
The incentive program is for certain staff members including the CEO and CIO. CalPERS’ fiscal year 2025 budget includes $37.1 million for annual incentive awards and $10.4 million for long-term incentive awards. CalPERS paid about $19 million in annual incentive awards in fiscal year 2023. The current fiscal year is the first year for potential long-term incentive payouts.
If the board makes those changes next year, it would reverse the work of former CalPERS CIO Yu "Ben" Meng, who had guided CalPERS toward a more centralized management of the pension fund in order to boost its returns. Board President Theresa Taylor noted during the April 15 committee meeting that the approach was taken to break up asset class silos that had developed within the team at the time.
During the same committee meeting, CalPERS CEO Marcie Frost said investment executives already receive a potential for increased incentives based on the performance of their asset class during a “calibration process” pension fund officials do every year.
If there is outsized asset class performance then that group is eligible for higher scores during a calibration process, Frost said.
Frost said the committee should wait to make any changes until the new CIO, Stephen Gilmore, is in place.
Another trend among CalPERS’ peers is that some are including environmental or climate change-focused objectives as part of their metrics for incentives, GGA reported. However, GGA recommended that CalPERS take a wait-and-see approach on that.
In other news, Frost announced that Michael Cohen, CalPERS' chief operating investment officer has been appointed chairman of the steering committee chair of Climate Action 100+, a global organization of investors working with the world’s largest companies to fight climate change. CalPERS co-founded the organization in 2017, and its former head of board governance and sustainability, Anne Simpson, served as the inaugural chair of the steering committee. Simpson is global head of sustainability for Franklin Templeton, and is still a steering committee member.
