Post-crash pension fund plans

The two big pension funds, CalPERS and CalSTRS, have suffered similar losses in the stock market crash, both with investment portfolios down 36 percent since their peak.

But they have different recovery plans.

The California State Teachers Retirement System, with a top executive staff in place for nearly a decade, is seeking gains through a short-term move that could shift more than $5 billion from stocks to high-yield debt instruments.

The larger California Public Employees Retirement System, with top executives new to their posts, has loosened asset allocation targets to avoid forcing sales that would lock in losses.

The two pension systems talked about their recovery plans this week at a joint session of the legislative retirement committees chaired by Assemblyman Ed Hernandez, D-West Covina, and Sen. Lou Correa, D-Santa Ana.

The CalSTRS plan would shift up to 5 percent of its assets from stocks to various kinds of debt instruments purchased from “distressed sellers” in three classes: fixed income, real estate and private equity.

Banks and others, who must quickly raise money to meet commitments, are said to have difficulty borrowing during the credit crunch and are being forced to dump solid assets.

The loans and other debt are expected to yield 15 percent or more, a better return than backers of the shift think can be expected from stocks in the next year or two. The CalSTRS chief investment officer, Chris Ailman, described the plan to the legislators.

“With the lack of capital that’s available in the market, we are seeing opportunities where there are distressed sellers who have decent assets that are performing and they have to sell them at bargain basement prices,” Ailman said.

Ailman said CalSTRS, while trying to remain “nimble” in case market conditions change, is allocating money to partners to purchase debt such as real estate loans and mortgages during an “economic crisis” that could last another 18 to 24 months.

“We are trying to make, at least for us, an interim tactical shift for the next 18 months,” said Ailman. “After that we will go back and return to our long-term investment targets.”

As the CalSTRS investment committee approved the plan last week, the only skepticism came from Tom Sheehy, who abstained from an otherwise unanimous vote.

“I don’t believe the investment staff has given us satisfactory examples of how this would actually work,” said Sheehy, who represents Finance Director Mike Genest.

The CalPERS chief executive officer, Anne Stausboll, appointed to the post in December after serving as interim chief investment officer, appeared at the hearing with Joseph Dear, the new chief investment officer appointed in January.

Stausboll said CalPERS usually adjusts its investment allocation between stocks, bonds and other asset classes every three years. She said the asset allocation targets were widened in December to avoid forcing sales that would lock in losses.

In addition, she said, CalPERS has added new asset classes: infrastructure, commodities, timber and inflation-risk bonds. Real estate and business holdings are being analyzed.

“So we are managing this current investment environment with short-term tactics as well as long-term strategies, our goal being to reposition the investment portfolio for eventual market recovery,” she said.

Stausboll said CalPERS is “ramping up” its investment in infrastructure. She said “the market dislocation does provide us with opportunities to invest in distressed companies.”

The CalPERS officials, who appeared first, got nearly all of the grilling from the legislators.

Sen. Alex Padilla, D-Los Angeles, suggested that CalPERS might have softened its losses if it had sold stock or taken other action last fall when the financial crisis erupted with the bankruptcy of Lehman Brothers and the federal rescue of AIG.

“We don’t like to think of ourselves as market timers,” said Dear, pointing to “daily conversations” at CalPERS about rebalancing the investment portfolio. “We think of ourselves as asset allocators.”

Padilla also asked for an explanation of the results after CalPERS placed AIG, the world’s largest insurance company, on its annual “focus list” for corporate governance improvement in 2005. Stausboll said she would find out and report back.

Assemblyman Warren Furutani, D-Long Beach, said he would like to know why former state Treasurer Phil Angelides did not follow through on a threat in 2005 to file a lawsuit after CalPERS lost $400 million on AIG stock amid allegations of fraud.

Correa asked if any of the recent CalPERS losses were due to misrepresentations or fraud, mentioning real estate as an example. Stausboll said litigation is being considered, but did not elaborate.

Hernandez said CalPERS investments have done well in the past as the stock market went up. He asked how its performance has compared with other large funds during the crash.

“Generally, our performance is in line with other large public pension funds,” said Dear. “We are slightly below benchmarks in a number of areas. I’m trying to understand why.”

Stausboll said the recent value of the CalPERS investment portfolio is $160 billion, down from a peak of $250 billion. She said CalPERS has been working with local government officials, who have been told a contribution increase is likely.

CalPERS warned members last fall that there could be an increase in employer contribution rates of 2 to 5 percent of payroll, if the value of the investment portfolio drops by 20 percent during the fiscal year ending in June.

Jack Ehnes, the CalSTRS chief executive officer, told the legislators that the recent value of the CalSTRS portfolio is about $111 billion, down from a high of $174 billion.

CalPERS has the power to set pension contribution rates for the state and 1,500 local retirement systems. But CalSTRS rates are set in statute and can only be changed by legislation.

Ehnes said CalSTRS had concluded in 2007 that contribution rates should be increased by 3.6 percent. He said the chance that a surging stock market would cover the gap was estimated to be only 40 percent then, and it’s much smaller now.

Ehnes said the current CalSTRS contribution rates are 8 percent of payroll from teachers, 8.25 percent from schools and about 2 percent from the state. He said the schools rate has not been adjusted in more than 20 years.

“But to the extent that there is adjustment needed, whether it’s at the school level or the state level … that’s a discussion that has to take place,” Ehnes said.

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Posted 13 Mar 09

4 Responses to “Post-crash pension fund plans”

  1. Jeff Says:

    “The loans and other debt are expected to yield 15 percent or more”

    How nice that there are such easy, low-risk, high returns available!

  2. CenCal Says:

    Pardon my disbelief on the stock 15% ROI….

  3. Raymond Jankowski Says:

    Will there be an annual CalPers retirement plan increase this year? If so, can you tell me how much?

    Thank you.

    Raymond Jankowski

  4. disease Says:

    Huntington’s Disease…

    Post-crash pension fund plans « Calpensions…

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