May 1, 2019
The California Public Employees’ Retirement System (CalPERS) is set to put a “laser-like focus” this proxy season on social issues like board diversity and executive pay. This is despite increasing concerns about CalPERS’ poor financial performance and pressure from the federal government to make sure public pension funds are making investments to increase returns.
According to Gary Wolfram, a professor of Economics and Public Policy at Hillsdale College this focus on “non-investment matters” may be negatively impacting their performance:
“Over the 10 years through Dec. 31, 2018, CalPERS has produced an average annual return of 7.9% while Vanguard Balanced Index a mutual fund whose assets are simply split 60% – 40% between a stock index and a bond index, returned 9.4% – a very large difference.”
Professor Wolfram also pointed out that SEC Commissioner Hester Pierce shared this concern in a speech she gave earlier this year:
‘Real dollars are being poured into adhering to an amorphous and shifting set of virtue markers,’ said Peirce. ‘I do not want the SEC to become an enabler of this shift in focus.’”
The editorial board at the Los Angeles Daily News is also concerned the fund’s focus on “ideological” concerns are limiting potentially lucrative investments:
“…CalPERS remains under constant pressure to reduce its investment options for ideological reasons – such as coal, guns, tobacco and other politically incorrect industries.”
CalPERS’ push comes despite a new executive order from the Trump Administration directing the Department of Labor to review their current guidance on the fiduciary duties of retirement plans subject to the Employee Retirement Income Security Act (ERISA), which governs private pension plans to ensure those entities are making investments that maximize the value of their portfolios. The order explains why this is a necessary:
“The United States capital markets are the deepest and most liquid in the world. They benefit from decades of sound regulation grounded in disclosure of information that, under an objective standard, is material to investors and owners seeking to make sound investment decisions or to understand the current and projected business…Furthermore, the United States capital markets have thrived under the principle that companies owe a fiduciary duty to their shareholders to strive to maximize shareholder return, consistent with the long-term growth of a company.”
Although public pension funds are not impacted by the executive order, the directive shows that the federal government would likely view CalPERS’ focus on non investment matters skeptically if it was subject to ERISA.
Perhaps it is time for the leadership at CalPERS to focus on increasing the returns on their investments for their members instead of pushing companies on “non-investment” related that do not fulfill their fiduciary duties to their pensioners.