The nation’s largest public pension fund has a retention problem, an especially pressing issue given the deep hole it and other retirement plans are in.
The California Public Employees’ Retirement System has burned through six chief investment officers over the past two decades. Its most recent investment chief,
lasted just 19 months. His tenure ended this summer in the midst of questions about whether his personal investments created a conflict of interest.
Elsewhere, investment chiefs stay for six to seven years on average at the 25 largest U.S. pension systems, according to 2018 research by Funston Advisory Services, a governance consultant.
Calpers is hoping to find a replacement by early next year and is trying to get on a longer-term footing.
The need for stability is acute: Calpers has only about 70% of the assets needed to pay future pension benefits for more than two million police officers, firefighters and other public workers and retirees. Annual pension bills for California towns are rising so quickly that some have resorted to borrowing and marijuana legalization to help cover the cost.
The role of Calpers investment chief is marked by its prestige and its difficulty.
The next CIO will manage a roughly $440 billion global portfolio of assets ranging from skyscrapers to forests, will command the attention of high-profile investors world-wide and will build a résumé that can be parlayed into a lucrative future on Wall Street.
The CIO will also face the unyielding glare of the national spotlight and answer to demanding groups with sometimes conflicting interests: vocal pension beneficiaries and a fractured board of elected officeholders, union officials and political appointees.
“There is no effective barrier between board politics and the investment staff,” said
a recruiter for institutional investors. “It’s a political stew and not a very tasty one.”
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Calpers lost several high-ranking investment office executives in 2020 and 2019, including its head of real assets, its head of sustainable investments and its No. 2 investment official, who lasted a little more than six months. Calpers went more than two years without a permanent private-equity head despite pinning high hopes on the $30 billion portfolio’s returns.
Now Calpers’s board is discussing a bonus of up to $850,000 for a new CIO based on long-term investment performance, a move that could encourage longer tenures. The fund is looking for a minimum five-year commitment, Calpers Chief Executive Officer
said at a virtual meeting of the Toronto Global Forum this fall.
The California State Teachers’ Retirement System, the nation’s second-biggest public pension fund, has held on to its CIO for more than 18 years. Some staffers at the teachers’ fund refer to former Calpers investment-office employees who come to work there as jumpers because they “jumped” across the Sacramento River from one pension headquarters to the other, people familiar with the matter said.
Calpers officials have said in internal discussions that they are looking first and foremost for another investment professional to serve as the next CIO, according to a person familiar with the matter. But the new investment chief should also be accustomed to the public eye, the board member Margaret Brown said at an October meeting, and a recruiter said the job will likely include appearing on national media outlets.
“The Calpers CIO holds a public job in the public spotlight, and all the candidates we’re talking with know that,” Ms. Frost said in a statement. “They also know that we’re focused on hiring an expert investor who can skillfully guide our global portfolio and help us deliver the retirement security our members have earned.”
At Calpers, past investment chiefs have swung between investment pros and savvy politicians.
Investment-focused CIOs at times clashed with the board before the 2008-09 financial crisis over issues ranging from choosing certain investment partners to avoiding investments in controversial areas, such as tobacco. Then, from 2009 to 2018, the fund retained two successive CIOs who had held multiple positions in state government but none investing money on Wall Street. But in eight of those 10 years, Calpers’s performance fell short of medians for public pensions of $5 billion or more as tracked by Wilshire Trust Universe Comparison Service.
‘The Calpers CIO holds a public job in the public spotlight, and all the candidates we’re talking with know that.’
Under Mr. Meng, a veteran of Barclays Global Investors and
Calpers’s returns beat peer pension performance by 2 percentage points. He arrived in the CIO post from a job at China’s foreign-exchange regulator and immediately began streamlining Calpers’s portfolio and investment staff.
Being a public official was more difficult for him. He had to spend more time dealing with board members and pension beneficiaries than he had expected and was personally hurt by an Indiana congressman’s remarks questioning his ties to China and Calpers’s holdings of Chinese companies. Mr. Meng is from China and became a U.S. citizen. No formal allegations were ever filed.
In an unrelated incident this year, Calpers began an internal probe into Mr. Meng’s personal holdings of
Blackstone Group Inc.
shares during a period when Calpers committed money to a private-equity fund managed by the firm. A California panel that fines public officials for conflicts of interests said in mid-August that it would look into the matter.
There is no evidence that Mr. Meng expected to benefit from the private-equity commitment. He had disclosed his ownership of the Blackstone shares upon taking the CIO job, and no one at Calpers had flagged it as a potential issue at the time, according to people familiar with the matter. Mr. Meng resigned Aug. 5 after the blog Naked Capitalism called attention to the investments, saying in a Calpers statement he wanted “to focus on my health and on my family and move on to the next chapter in my life.”
At an investment-committee meeting the following month,
the chair, credited him with positioning Calpers’s investments to excel. “It’s a shame that we’ve lost Mr. Meng,” she said.
After six years of the Calpers CIO reporting only to the CEO, who reports to the board, the board voted in September to again play a formal role in hiring and firing the investment chief.
The CIO-to-CEO reporting structure created a buffer, at least on paper, between the board and the CIO. But some board members felt shut out when they learned of the investigation of Mr. Meng only after his resignation, according to people familiar with the matter.
—Dawn Lim and Vipal Monga contributed to this article.
Write to Heather Gillers at email@example.com