CalPERS ahead of earnings goal with absence at top. When will investment chief vacancy hurt?

A key player in the C-suite, a chief investment officer keeps watch over CalPERS’s money-making strategy. Ideally, the financial leader is equal parts daring and wise when making weighty investment decisions, ensuring pension promises are fulfilled to 2 million California public employees and retirees.

California’s largest public pension fund has not yet found those rare qualities in a candidate since its last CIO abruptly resigned eight months ago. A worldwide search was suspended in March.

But when will this absence at the top matter? And will it affect the investment arm’s bottom line?

The short answer is: we’ll see.

At the close of the fiscal year in June, the California Public Employees’ Retirement System will know whether it hit or missed its investment target — a 7% rate of return that has mostly eluded the organization in recent years. That’s important because when it falls short of that mark cities, schools and special districts have to cough up money to make up the losses.

Achieving that target is why observers and critics note that the investment chief role is critically important.

“The CIO needs to show leadership, exercise good judgment, run the organization efficiently and effectively, and communicate to a multitude of audiences,” said Olivia Mitchell, a pension expert at the University of Pennsylvania’s Wharton School.

“In other words, the chief investment officer is a vital member of the pension organization, and the longer the post remains open, the more difficult it will be to ensure that all the fund is fulfilling its obligations.”

Former CIO Yu Ben Meng suddenly departed last year after an anonymous ethics complaint to the Fair Political Practices Commission alleged he approved a $1 billion deal with the New York financial firm Blackstone Group while personally holding as much as $100,000 in the company’s stock.

The revelation marked another embarrassing chapter for the agency. In 2018, a blogger revealed exaggerated claims on the resume of newly-hired chief financial officer Charles Asubonten, prompting him to resign. Two years prior, former CEO Fred Buenrostro was sent to prison for taking bribes from former CalPERS board member Alfred Villalobos.

After Meng’s resignation, the CalPERS board discussed changes to its conflict of interest policy last year but took no action. On Monday it is scheduled to consider a number of changes to compensation for the investment chief role, including a new long-term incentive plan to encourage retention. The added incentive could yield as much as a full year’s salary to the chief investment officer’s pay package. It would be paid out at the end of three or more years.

The maximum earnings for the next CIO, including annual incentives, would be in the ballpark of $2.8 million, according to a report prepared by the consultancy Global Governance Advisors.

Meanwhile, CalPERS officials say the fund is on track to reach its goals, raking in a 12.4% return at the end of the 2020 calendar year. There is no guarantee where its value will land on June 30, which is the end of its fiscal year and when the pension fund determines whether it hit its investment target.

The fund closed last fiscal year with around $392 billion, generating a 4.7% rate of return. CalPERS officials said that was better than the 3.2% return earned by the median pension funds that period. Besides, the fund’s value was up to $459 billion at the close of business Thursday.

“Our Investment professionals are executing on our long-term investment strategy developed as a team over the past few years,” CalPERS Chief Executive Officer Marcie Frost said in a prepared statement. “You can see their success in recent investment returns that have topped many of our industry peers. Every day they’re working to build on those achievements, strengthen the fund, and deliver retirement security to our 2 million members.”

Dan Bienvenue, a deputy investment chief who has been with CalPERS since 2004, stepped into the role of interim CIO. Frost previously said the search will resume in the early summer as the restrictions to contain the coronavirus pandemic are expected to be lifted.

“I can certainly see how people would not — given the circumstances — be ready to pack up and move into the spot based on Zoom interviews,” said Ted Toppin, chairman of the union-supported group Californians for Retirement Security. He’s also executive director of Professional Engineers in California Government.

“This position is big and important and the people who were being considered, and will be considered in the future are making a major decision in their lives. I can see why they wouldn’t want to make it on Zoom.”

Other stakeholders are content with the explanation and the promising financial results.

“I’m concerned of course. I want them to fill the position as soon as they can. But I can understand why it’s so difficult for them to do it,” said Tim Behrens, president of the California State Retirees, who added that the potential restrictions on personal investments might also play a role.

“As long as they keep on making money and we keep on getting our pensions, I think everybody is going to be tolerant of the slow hire of the new CIO.”

This story was originally published April 19, 2021 at 5:00 AM with the headline "CalPERS ahead of earnings goal with absence at top. When will investment chief vacancy hurt?."