Two articles appeared in the FT at the end of last year that have given me food for thought. They’ve helped me sharpen my focus on this blog’s purpose as we go back to work today. There is a simple message from the articles which look at the great theme of governance – value for money.
The first is a thoughtful interview by Jo Cumbo with Calpers CEO, Marcie Frost.
.@JosephineCumbo spoke with Marcie Frost, the CEO of Calpers, in a wide-ranging interview. Lots of interesting tidbits incl how the head of the biggest US pension plan still sees hedge fund fees as ‘problematic’. https://t.co/t9YNTZXLkY (10/x)
— Adam Samson (@adamsamson) January 3, 2022
Calpers pays pensions to 2m public service workers on the west coast of the USA and has $500bn under management. We learn from the interview that Calpers has a long-term target investment return of 6.8% pa (what Con Keating calls its “contractual accrual rate” or CAR). We also learn that Calpers ditched using hedge fund managers 7 years ago and is now looking to access private markets through direct investment rather than pay private equity funds fees that it considers poor value.
“We all have to look at fees. Everything we are paying to an outside manager is money that is not available to pay benefits.” – Marcie Frost
Calpers is increasing its allocations to private markets, debt but especially private equity as it sees publicly listed equities as “over-cooked” and because there are better opportunities to exert stewardship over the ESG of private companies. Put another way, Calpers can make an impact both to return and to the society in which its members work.
Frost also talks of allowing the fund to borrow to extend its diversification into low-risk, low-return stocks – something we know as liability driven investment. This has been successfully practiced in the UK to stabilize returns and pay pensions but is only now becoming part of US strategies..
What is reassuring about the interview is the strong focus on paying pensions as the purpose of the fund. The CAR has to be achieved if pensions aren’t to be cut or the plan sponsors be called on higher contributions (effectively an increase in taxation). Taking responsibility for funding pensions in this way – and articulating the strategy to the FT is commendable.
Not such good value.
The second article relates to the Australian “Super” pension funds which the FT in 2017 called “the envy of the world”. That sounds a little hubristic five years on
— Josephine Cumbo (@JosephineCumbo) January 1, 2022
Despite efforts to properly disclose what is going on within the Super system, it appears the consumer is unable to “look through” to the underlying investments
Disclosure rules for Australian pension funds have been so watered-down that it will be impossible for savers to understand the true risks of a portfolio, according to experts who said the country is failing on financial regulation
Unlike Calpers, which is being managed to pay pensions, Australian Superannuation Funds, provide people with a pot of money that they choose how to spend.
The regulations mean that Australia’s enormous superannuation sector — the world’s fourth-largest pool of pension assets, behind the US, UK and the Netherlands — remains one of its most opaque, exposing savers to investment risk and potential overcharging.
“Where the government has landed means there is no way investors could use the . . . data for portfolio comparison, nor is there a way you could use this data to understand the true risks of a portfolio,” said Grant Kennaway, head of manager selection for Morningstar in Melbourne.
There is a sense, in reading this and other articles on the Australian Supers that they need some Marcie Frosts. People, prepared to state the strategy of each fund, explain the target return and how it is being achieved. Instead, comment comes from fund managers and from Morningstar, monitoring funds. Intermediation is all too obvious. We are left wondering who is accountable for the management of returns and the containment of fees. Indeed who is acting for members?
Value for money in UK pensions
It’s too simplistic to write “Calpers good, Super bad”, the American DB system is mostly a mess and – for all its failures, the Australian Super system is held in high esteem by those who use it.
In the UK, we still have an occupational pension industry which is paying some 16% of retirement income to those in retirement. The majority of the pensions we receive are paid by the state and are only funded by Government borrowing. Our DC system is yet to make an appreciable difference for most people and it will be some years before we can talk of our workplace pensions as the Australians do of Super.
In the meantime , I suggest we have two models we could follow. We could look to Calpers where financial services serve the member because of Calpers size and good management. Or we can follow the Australian model, where the financial services industry appears to have got Super in a headlock with the interests of funds being put ahead of members.
As the UK looks to follow Calpers towards higher exposure to private equity, we must avoid the mistake made in Australia over the past ten years. That means being very clear about who pension schemes are for and what they offer, clear about target returns and clear about the value we are getting for our money.
The FT as thought leader
Four years ago I took out a subscription to the FT, it is not cheap but it is value for money. Many blogs, like this one, are built around articles I have read and I’m very grateful for it allowing me the odd cut and paste.
The subscription options are available here
If you are keen to read an article but cannot afford a subscription, I have a number of “guest links” that I can share. Simply email firstname.lastname@example.org and I will do my best (the links aren’t limitless!)