The extraordinary thing about the FT’s conversation with outgoing CI of Calstrs , Christopher Cailman, is that a pension fund’s attitude to the behaviour of its privately owned  investments , should be its front story.

Calstrs – the Californian Teachers Fund is currently 40% invested in private , 60% invested in publicly quoted markets. That gives it the leverage to matter to private markets managers.

Here we have a report of effective governance  in action and it is what the Mansion House reforms would lead to if our public sector funds raised their private market allocations to these levels.

Private equity should share more wealth with workers, says US pension giant

In America, where unions are not as powerful in the public sector as they are here, it is the pension funds who hold the feet of employers to the fire. Capital talks in a capitalist society and private equity is capitalism at its most focussed.

While we have plenty of levers to require the managers of publicly quoted companies to behave in the right way, we have relatively little power of privatised companies, which are at the other end of the scale , when it comes to public scrutiny to the pension schemes that increasingly invest in them.

As  private equity managers court public and private sector schemes (DB and DC) , they will need to be more transparent in their practices with regards matters such as the distribution of profits.

The FT reports

“Private equity has not shared enough revenues,” said Ailman, who pioneered Calstrs’ move into private equity two decades ago and now holds $50bn in the asset class…“It’s great they make money for our retirees — who are teachers and for other funds,” he said. “But they need to also share the wealth with the workers of those companies and with the communities they invest in.”

The Labour party, the odds on favourites to hold political power from the end of the year, should consider this. In areas where unions have little sway, it is the owners of the equity of the private companies that so many of us work for, who control the activities of the management.

If ownership of our private companies becomes the pension funds we invest our savings in, we now have new levers to ensure a fairer society. Paradoxically, the power of capital, when exerted by fiduciaries of our pension schemes, can provide the positive social outcomes that our trade unions have been campaigning for , for years.

This is why it is critical that trade unions continue to lobby the pension industry for better standards of governance and why organisations like PIRC, Share Action and Minerva, are omnipresent in the thinking of pension scheme investment officers.

Of course, the primary reason for pension funds to invest in private markets is to create safer pensions for those it pays and to improve the affordability of those benefits to sponsors. This is still being achieved by Calstrs , 16% of whose fund is invested in private equity

“When I started we assumed that private equity would generate as much as 500 basis points over publics, then we lowered it to 300,” said Ailman, who has been chief investment officer since 2000. “I wonder if it is now more realistic to assume that private equity will only really generate around 150 basis points over publics.” He added that fees “were high” and “needed to be lower”, but said that the net return was “still worth it” and that the fund was taking steps to reduce these costs.

There is a lot you can do with even 150bps of added return from 16% of a fund as large as Castrs. Let’s hope that that is not lost on those charged with implementing the Mansion House Reforms in the UK. Pension schemes could provide the spur to improve labour conditions and reward for employees of companies that have the benefit of their  ownership.

Unions , trustees and private equity managers should have aligned interests.