How much risk should pensioners accept?

October 23, 2009

Calpers, the California Public Employees Retirement System, manages about as much money the gross domestic product of Israel – around $200 billion at the latest count.

The long term financial security of 1.6 million people, from firefighters to janitors and judges, depends on Calpers getting it right.

America’s biggest pension fund, Calpers built up a gold plated reputation over the decades, founded on steady returns combined with a willingness to pioneer new investments and police public companies as an activist shareholder.

But in an embarrassing reversal of fortune, it said this month it was probing fees paid by outside money managers to win its business, expanding a review of “pay-to-play” schemes at public retirement systems that has spread across the nation.

Corruption, if it happened, is bad enough. But Reuters has been investigating whether pensioners and state workers in California should be equally worried about the fund’s perfectly legal activities.

In the past decade, Calpers has diversified its asset allocation from a portfolio that was almost entirely stocks and bonds into one that also has substantial chunks of money invested in private equity, real estate and inflation-linked assets – a category that includes commodities, infrastructure and forestry.

For a while, Calpers looked smart, hitting a peak fund value of $250 billion in the fall of 2007 as it borrowed money to boost returns and moved into sophisticated collateralized debt obligations, land for residential real estate, as well as commodities.

But as the financial crisis unfolded last year, Calpers lost $90 billion, more than a third of its value, tumbling to $160 billion about a year after the high.

Even from 2002 to 2007, you can see from the graphic below that it was only marginally outperforming the middle-ranked big public pension fund.

Real estate and private equity were the worst performing sectors last year. But Calpers has not retreated from higher risk investments — just the opposite, in fact.

As the entire pension industry questions what level of risk it should be taking in the aftermath of last year’s financial meltdown, Calpers in June increased its target for venture capital and private equity — what the fund’s advisor itself called the highest risk, highest reward bet — to 14 percent of overall investments, up from 10 percent.

Tell us what you think – how much risk should a public pension fund like Calpers take? Does its vast pool of money mean it can afford to gamble some of that money on high risk investments that could fail?


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I reject the tendency to constantly try to improve on returns by increasing risk. Calpers past performance is commendable and should be continued but not increasing risk.

Posted by JAMES MIMA | Report as abusive

Calpers hasn’t learned anything and is now like a losing gambler, only interested in recouping its previous losses with even riskier bets.

The fund managers should be arrested for official malfeasance.

Posted by Gary D | Report as abusive


Posted by john | Report as abusive

Risky investments look good when things are going up and are almost like death throes when things are going down. The loss of money can be explained but the damage to lives is incalculable. The people at the head of the pension funds need to buy some good insurance, because if things get nasty there will not be anywhere to hide. I do not think we have seen all the results of the great amount of damage done to the spirit of this country which was done by inane decisions of the Bush administration.

Posted by f belz | Report as abusive

Just as Fed was unable to see what was in store for the economy, its acceptable that CalPERS also missed it.

What I’m wondering is the decision to lower the asset allocation mix from 56% to 49% on the global euqity asset class (as per the latest allocation figures). Wouldn’t be a good idea to buy equities considering the valuation gloablly is at much reasonable that what it was in 2007? Therefore aiming for a good return when the market bounce back?

Decision to hike the private equity to 14% from 10% looks sounds to be like a pension fund transforming to a hedge fund. Are we loosing the distinction between a pension fund and a hedge fund?

Posted by Aslam | Report as abusive