CalPERS shelves controversial private equity policy

The state’s biggest public pension fund has repeatedly missed a key performance goal for its controversial private equity investments.

But a CalPERS committee said Monday that the fund’s staff could not strip language from a written policy that required them to aim to meet that benchmark – returns roughly 3% higher than the stock market to compensate for private equity’s risk.

By voice vote, the committee defeated the proposal to change the policy so that the new objective would have been simply “to enhance” the pension fund’s private equity returns.

“I think maximizing risk-adjusted rates of return is what this asset class is all about,” said J.J. Jelincic, one of the investment committee’s members during the meeting. “And so I do think that should be put back in.”

The suggested policy change had been criticized by financial experts who said it would clear the way for CalPERS to continue to invest in the complex Wall Street sector – the buying and selling of companies -- without requiring higher returns to compensate for the added risk.

“This is outrageous,” Eileen Appelbaum, a senior economist at the Center for Economic and Policy Research, a Washington think tank, said before the meeting. “CalPERS can’t get over the goal, now plans to do away with goal post.”

At the meeting, Wylie Tollette, CalPERS chief operating investment officer, told the committee that the change was part of the staff’s effort “to eliminate vague and untestable language from all the investment policies.”

Tollette said the language change to the “Strategic Objective” section of the policy would do nothing to stop staff from trying to meet the benchmark, which would remain in place.

The proposed policy change came after many years where CalPERS failed to meet the so-called “risk-adjusted” benchmark.

For the year ended June 30, for instance, private equity earned a seemingly healthy 8.9%, but that was lower than the 11.1% goal.

A recent report by a CalPERS’ consultant acknowledged that the private equity investments had also failed to beat benchmarks over the last three, five and 10 years.

Appelbaum said that CalPERS would have made the same amount over the last 10 years if it would have just invested in the stock market – but without the added risks or high fees.

At previous meetings CalPERS board members have discussed whether the private equity goal was too aggressive.

And in a press release Monday, CalPERS said it still planned to consider revising the benchmark next year.

On Monday, Andrew Junkin of Wilshire Consulting told the committee that it doesn’t make sense to lower the benchmark to less then 3% over the stock index.

“At that point I don’t think private equity is worth it,” Junkin said.

CalPERS and other public pension plans across the country have relied on private equity to meet their ambitious annual return targets.

Public labor unions have generally supported that strategy. If investments earn high returns and can cover more of the cost of pensions, they appear less expensive to taxpayers.

Currently CalPERS estimates its investments will earn 7.5% each year over the decades. When the return falls short, taxpayers pick up the difference.

Last month, CalPERS’ board agreed to lower its expected investment return slowly over the coming decades to 6.5%. Simultaneously, the pension fund would begin moving some of its $293 billion to safer investments.

CalPERS provides benefits for 1.7 million employees and retirees of the state, cities and other government agencies across California.

Times staff writer Dean Starkman contributed to this report.

Twitter: @melodypetersen

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