Are Your Pension(s) Safe? Why It Is Worth Keeping An Eye On Them
Introduction
In the first part of this two part series, I explained how the pension investment industry worked and why pension holders should keep an eye on them. I pointed out:
I used the California Public Employees' retirement System (CalPERS), the second largest pension in the US, as the “poster child” for both problems. And in January 2015, its problems were highlighted when Alfred J.R. Villalobos (pictured above), a former CalPERS board member committed suicide. Villalobos faced trial on federal corruption and bribery charges for allegedly earning about $50 million as a middleman in winning CalPERS investments for private equity clients.
And sadly, Pensions and Investments (P&I) reports that CalPERS is again in the news for the wrong reasons. CalPERS reported it does not know how much it is paying private equity companies for performance. Before getting to this latest “problem”, some background on this pension investment giant is in order.
The CalPERS Investment Structure
CalPERS has investments of just over $300 billion, second only in size in the US to Federal Retirement Thrift (TSP), the Federal government workers' pension.
Most pensions have investment committees that do all they can to avoid being held responsible for the performance of their investments. How is this done? Typically, it includes hiring a financial consultant to recommend financial institutions to make investments for the pension. This allows the pension committee to blame the consultant and the financial institutions they help pick for bad performance.
CalPERS uses this approach in a unique way. Its latest financial report indicates that in 2014, it hired 54 consulting firms at a cost of $21.7 million to help it choose investment managers. Table 1 details the costs and numbers of investment managers it hired with the consultants assisting. In total, it paid out $1.15 billion in fees to 250 investment managers who in turn decide what to invest in. Now, paying out this amount is quite reasonable when you are investing $303 billion (0.38%). However, loosing track of what large payments are being made for is another matter.
