How much risk should pensioners accept?
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?