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How Long Will Your Pension Fund Last?

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Retired public employees from California are suffering the ill effects of having their pension fund, CalPERS, the largest in the country, politicized. CalPERS has focused intently on using its influence in markets to achieve political goals, but now shareholders are getting upset with its lackluster performance. The Wall Street Journal’s James Freeman reports:

There is no such thing as a free lunch. Activists who think they can use public companies to pursue political agendas without endangering shareholder returns are indulging in a fantasy. Disappointing results at a giant government pension fund cannot all be tied to political agendas, but the retired workers who rely on Calpers have every right to demand that fund managers adopt a singular focus on maximizing returns. Heather Gillers reports in the Journal:

The nation’s largest pension fund got a scathing performance review Monday when its new investment chief highlighted the retirement system’s underperforming returns…

The unusually candid presentation to board members of the California Public Employees’ Retirement System, known as Calpers, showed returns lagging behind other large pensions in almost every asset class during the past 10 years, with private equity trailing the most, 1.3 percentage points…

“I am a little disappointed, and I get it, I know there’s lots of things that go into the buckets of why our performance has been poor,” said board president Theresa Taylor.

Let’s hope Calpers finally gets it, and a good fresh start would include a determination to urge portfolio companies to simply pursue profits, not politics. For years, the big fund has been fairly active in pursuing the latter, despite early red flags.

The Journal’s Carolyn Cui reported in 2010:

New funds are springing up that blend quantitative investing, using financial data and computer models, with socially responsible investing, a method of picking stocks based on a company’s environmental, social and governance practices, known as ESG… Calpers has committed $500 million to ESG investing, mainly by avoiding stocks that rank low on the ESG scale. But the returns haven’t been satisfactory, Calpers said.

That should have been the end of what was a relatively small experiment by Calpers standards, but the big pension fund pressed ahead. Ms. Cui reported a small new investment in a quant fund focused on ESG and noted “a broader plan by Calpers to incorporate ESG investing across all of its funds by the middle of next year.”

By 2018, the political agenda was clearly annoying a lot of the people who rely on Calpers to fund their retirements. That year former SEC commissioner Paul Atkins wrote in the Journal:

The California Public Employees’ Retirement System this month said no thank you to pension-fund activism. Government workers unseated Priya Mathur, the sitting Calpers president. She was defeated by Jason Perez, a police-union official who criticized Ms. Mathur’s focus on environmental, social and governance investing, or ESG. Mr. Perez emphasizes the agency’s fiduciary duty to maximize investor returns.

Calpers represents almost two million California public employees, retirees and families. Yet it mostly makes headlines for its activism, such as divestiture from the tobacco industry. “It’s been used more as a political-action committee than a retirement fund,” said Mr. Perez. “I think the public agency [employees] are just sick of the shenanigans.”

Mr. Atkins described more such shenanigans at the lagging fund:

While Calpers beneficiaries are demanding a renewed focus on returns, activists continue to work other channels to impose agenda-driven requirements on public companies. Sen. Elizabeth Warren last month unveiled a bill that would direct the SEC to mandate that all public companies disclose fossil-fuel use and greenhouse-gas emissions. This month a petition signed by 17 law professors and institutional investors, including Calpers, asked the SEC to develop mandatory rules for public companies to disclose ESG information.

During his time on the board Mr. Perez appeared to make some headway in reducing politicization of investment decisions. But by 2021 the Journal’s Justin Baer was reporting on an effort to apply pressure to Warren Buffett’s Berkshire Hathaway:

…Berkshire’s lackluster returns in recent years have made it more vulnerable to criticism amid a growing wave of investor interest in corporate sustainability issues…

Under Mr. Buffett’s leadership, the firm boasts 20% compounded annualized gains from 1965 to 2020, outperforming the S&P 500’s 10.2% gains including dividends during the period. Berkshire’s total returns over the past three- and five-year periods were 12% and 14%, respectively, compared with the index’s 19% and 18%.

“Berkshire has gotten a pass in part because of its historically strong financial performance,” said Simiso Nzima, head of corporate governance at Calpers…

Calpers, the nation’s largest public-pension fund with $444 billion in assets, co-sponsored a shareholder proposal imploring Berkshire to provide more disclosures on climate-related risks and opportunities.

The pension fund is also withholding its votes to re-elect members of the board’s audit and governance committees on grounds of failing to meet shareholder demands over climate-risk disclosures. It said it was concerned that the board lacks new members, doesn’t engage with shareholders and isn’t letting investors vote on executive pay plans.

One can certainly argue that Berkshire’s performance in recent years could have been better, but does anyone think Calpers officials have a better understanding of investment risk than Warren Buffett?

Calpers’ disappointing decade is another reminder that taking care of retirees’ investments requires profits, not politics.

Action Line: When retirees look at the “spaghetti charts” showing how long their money will last into their retirements, they don’t want to calculate the effect the changing politics of fund managers will have on their savings. If you want to avoid the spaghetti chart political uncertainty, let’s talk. In the meantime, click here to subscribe to my free monthly Survive & Thrive letter, and get to know me better.

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E.J. Smith - Your Survival Guy

E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. His focus at all times is on preparing clients and readers for “Times Like These.” E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zildjians. He grew-up worshiping Neil Peart (RIP) of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West and Paris. Please get in touch with E.J. at ejsmith@yoursurvivalguy.com To sign up for my free monthly Survive & Thrive letter, click here.