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According to CalPERS’ proposed budget, obtained by Bloomberg, the 8 percent decrease in fees will come from several areas:
Calpers projects it will pay about $100 million less in fees for hedge-fund investments. The pension has said it would take about a year to unwind all its holdings. It paid $135 million in fees in the fiscal year that ended June 30 for hedge-fund investments, which earned 7.1 percent and added 0.4 percent to its total return, according to Calpers figures.
Brad Pacheco, spokesman for the pension fund, wasn’t immediately available for comment.
Base fees for private-equity investments are projected to decline 7.5 percent to $440.6 million as some investments matured, the number of managers was reduced and Calpers won better terms for new deals.
Base fees for company stock managers are projected to increase 25 percent to $51.3 million. Fees for performance are projected to decrease by $32.6 million because of favorable renegotiated contract terms, Calpers said.
The largest U.S. state pension fund, known as Calpers, projects that it will pay $930.7 million in base and performance fees to investment firms in the fiscal year that begins July 1, down from more than $1 billion this year and $1.3 billion last year, according to the fund’s proposed budget.
CalPERS managed $295.8 billion in assets as of December 31, 2014.
It’s about time the media and non-profit organizations start scrutinizing executive pay at public pension funds. I’ve been covering the good, the bad and downright ugly on executive compensation at Canada’s large public pension funds since the inception of this blog back in June 2008.
If compensation is tied to performance and benchmarks, doesn’t the public have a right to know whether or not the benchmarks used to evaluate this performance accurately reflect the risks taken by the investment manager(s)?
The dirtiest secret in the pension fund world is that benchmarks used to reference the performance of private investments and hedge fund activities in public pension funds are grossly underestimating the risks taken by the managers to achieve their returns. Moreover, most of the “alpha” from these investment activities is just “beta” of the underlying asset class. Why are pension executives being compensated for what is essentially beta?!?!?
There is a disconnect between public market benchmarks and private market benchmarks. Most pension funds use well known public market benchmarks like the S&P 500 to evaluate the performance of their internal and external managers. Public market benchmarks are well known and for the most part, they accurately reflect the risks that investment managers are taking (the worst example was the ABCP fallout at the Caisse which the media keeps covering up).
But there are no standard private market benchmarks; these investments are illiquid and valued on a quarterly basis with lags. This leads to some serious issues. In particular, if the underlying benchmark does not reflect the risk of private market investments, a pension fund can wipe out its entire risk budget if real estate or private equity gets hit hard in any given year, which is not hard to fathom in the current environment.
I followed up that first blog comment with my second comment on alternative investments and bogus benchmarks where I used the returns and benchmarks of real estate investments at a few of Canada’s large public pension funds to demonstrate how some were gaming their benchmarks to claim “significant outperformance and value-added” in order to justify their multimillion compensation packages even as their funds lost billions during the crisis.
In April 2009, I went to Parliament Hill where I was invited to speak at the Standing Committee on Finance on matters relating to pensions (after that hearing, I was even confronted by Claude Lamoureux, the former CEO at Ontario Teachers largely credited for starting this trend to pay top dollars to senior pension fund managers, which then spread elsewhere). There, I discussed abuses on benchmarks and how pension fund managers routinely game private market benchmarks to create “value-added” in their overall results to justify some seriously hefty payouts for their senior executives.
This brings me to the list above (click on image at the top). Where is Gordon Fyfe, the man who you can all indirectly credit for this blog? He should be right up there at the top of this list. He left PSP for bcIMC this past summer right on time to evade getting grilled on why PSP skirted foreign taxes, embarrassing the federal government.
In fact, over the ten years at the helm of PSP Investments, a federal Crown corporation that is in charge of managing the pensions of people on the federal government’s payroll, Gordon Fyfe and his senior executives literally made off like bandits, especially in the last few years. This is why I poked fun at them when I covered PSP’s FY 2014 results but was dead serious when I wrote this:
As you can see, PSP’s senior executives all saw a reduction in total compensation (new rules were put in place to curb excessive comp) but they still made off like bandits, collecting millions in total compensation. Once again, Mr. Fyfe made the most, $4.2 million in FY 2014 and a whopping total of close to $13 million over the last three fiscal years.
This type of excessive compensation for public pension fund managers beating their bogus private market benchmarks over a four-year rolling return period really makes my blood boil. Where is the Treasury Board and Auditor General of Canada when it comes to curbing such blatant abuses? (As explained here, the Auditor General of Canada rubber stamps financial audits but has failed to do an in-depth performance audit of PSP).
And don’t think that PSP’s employees are all getting paid big bucks. The lion’s share of the short-term incentive plan (STIP) and long-term incentive plan (LTIP) was paid out to five senior executives but other employees did participate.
Nothing is more contentious than CEO pay at public sector organizations. The Vancouver Sun just published an article listing the top salaries of public sector executives where it states:
Topping this year’s salary ranking is former bcIMC CEO Doug Pearce, with total remuneration of $1.5 million in 2013, the most recent year for which data is available. That’s a 24-per-cent jump from his pay the year before of $1.2 million.
It could be the last No. 1 ranking for Pearce, who has topped The Sun’s salary ranking several times: he retired in the summer of 2014 and was replaced by Gordon Fyfe.
Wait till the socialist press in British Columbia see Fyfe’s remuneration, that will really rattle them!
It’s worth noting however even in Canada, compensation of senior public pension fund managers varies considerably. On one end of the spectrum, you have Jim Leech and Gordon Fyfe, and on the other end you have Leo de Bever, Michael Sabia and Doug Pearce, Fyfe’s predecessor at bcIMC (Ron Mock currently lies in the middle but his compensation will rise significantly to reflect his new role).
Mark Wiseman and André Bourbonnais, PSP’s new CEO, actually fall in the upper average of this wide spectrum but there’s no doubt, they also enjoyed hefty payouts in FY 2014 (notice however, Wiseman and Bourbonnais made the same amount, which shows you their compensation system is much flatter than the one at PSP’s).
Still, teachers, police officers, firemen, civil servants, soldiers, nurses, all making extremely modest incomes and suffering from budget cuts and austerity, will look at these hefty payouts and rightfully wonder why are senior public pension fund managers managing their retirement being compensated like some of Canada’s top private sector CEOs and making more than their private sector counterparts working at mutual funds and banks?
And therein lies the sticking point. The senior executives at Ontario Teachers, CPPIB, PSP, bcIMC, AIMCo, OMERS, Caisse are all managing assets of public sector workers that have no choice on who manages their assets. These public sector employees are all captive clients of these large pensions. I’m not sure about the nurses and healthcare workers at HOOPP but that is a private pension plan (never understood why it is private and not public but the compensation of HOOPP’s senior executives is in line with that at other large Canadian pension funds, albeit not as high even if along with Teachers, it’s arguably the best pension plan in Canada).
Of course, all this negative press on payouts at public pension funds can also be a huge distraction and potentially disastrous. Importantly, Canada’s large public pension funds are among the best in the world precisely because unlike the United States and elsewhere, they got the governance and compensation right, operating at arms-length from the government and paying people properly to deliver outstanding results in public and private markets.
And let’s be clear on something, the brutal truth on defined-contribution plans is they simply can’t compete with Canada’s large defined-benefit pensions and will never be able to match their results because they’re not investing across public and private markets, they don’t have the scale to significantly lower costs and don’t enjoy a very long investment horizon. Also, Canada’s large pensions invest directly in public and private assets and many of them also invest and co-invest with the very best private equity, real estate funds and hedge funds.
In other words, it’s not easy comparing public pension fund payouts to their private sector counterparts because the skills required to manage private investments are different than those required to manage public investments.
I’ll share something else with you. I remember having a conversation with Mark Wiseman when I last visited CPPIB and he told me flat out that he knows he’s being compensated extremely well. He also told me even though he will never be able to attract top talent away from private equity funds, CPPIB’s large pool of capital (due to captive clients), long investment horizon and competitive compensation is why he’s able to attract top talent from places like Goldman Sachs.
In fact, Bourbonnais’s successor at CPPIB, Mark Jenkins, is a Goldman alumni but let’s be clear, most people are still dying to work at Goldman where compensation is significantly higher than at any other place.
But we need to be very careful when discussing compensation at Canada’s large pensions. The shift toward private assets which everyone is doing — mostly because they want to shift away from volatile public markets and unlock hidden value in private investments using their long investment horizon, and partly because they can game their private market benchmarks more easily — requires a different skill set and you have to pay up for that skill set in order to deliver outstanding long-term results.
Also, as I noted above, Canadian pensions invest a significant portion of their assets internally. This last point was underscored in an email Jim Keohane, CEO of HOOPP, sent me regarding the FT article above where he notes (added emphasis is mine):
You have to be careful with this type of simple comparison of Canadian pension plans with their US, European and Australian counterparts. It is a bit like comparing apples to oranges because the Canadian pension funds operate very different business models. The large Canadian funds use in house management teams to manage the vast majority of their assets, whereas most of these foreign funds mentioned outsource all or a significant portion of their assets to third party money managers. They are paying significantly larger amounts to these third party managers to run their money as compared to the amounts that Canadian pension funds pay their internal staff. As a result, their total implementation costs are significantly higher than Canadian funds. The right metric to compare is total implementation costs, and on this metric, Canadian funds are among the most efficient in the world.
We have very low implementation costs, with investment costs of approximately 20bps and total operating costs including the admin side between 30 and 35bps. We hire top investment managers to run our money and need to pay market competitive compensation to attract and retain them. I would agree that our long term nature and captive capital make us an attractive place to work so we don’t have to be the highest payer to attract talent, but we need to be in the ballpark. Running our money internally is significantly cheaper than the outsourcing alternative. It also allows you to pursue strategies that would be very difficult to pursue via an outsourcing solution, and it enables much more effective risk management.
One of the main reasons why Canadian pension plans have been successful is the independent governance structures that have been put in place. This enables funds like HOOPP to be run like a business in the best interest of the plan members. It is in the members best interest to implement the plan at the lowest possible cost. The cheapest way for us to run the fund is using an in-house staff paying them competitive compensation rather than outsource which would be much more costly. To put this in perspective, a few years ago we had 15% of our fund outsourced to third party money managers, and that 15% cost more to run than the other 85%!
Many of the international funds used for comparison in the article have poor governance structures fraught with political interference *which makes it politically unpalatable to write large cheques to in-house managers, so instead they write much larger cheques to outside managers because it gets masked as paying for a service. This is not in plan members best interests.
I agree with all the points Jim Keohane raises in regard to the pitfalls of making international comparisons.
But does this mean we shouldn’t scrutinize compensation at Canada’s large public pensions? Absolutely not. A few weeks ago when I discussed whether pensions are systemically important with Jim, I said we don’t need to regulate them with some omnipotent regulator but we definitely need to continuously improve pension governance:
… I brought up the point that in the past, Canadian public pensions have made unwise investment decisions, and some of them could have exacerbated the financial crisis. The ABCP crisis had a somewhat happy ending but only because the Bank of Canada got involved and forced players to negotiate a deal, averting a systemic crisis. And we still don’t know everything that led to this crisis because the media in Quebec and elsewhere are covering it up.
I also told him we need to introduce uniform comprehensive performance, operational and risk audits at all of Canada’s major pensions and these audits need to be conducted by independent and qualified third parties that are properly staffed to conduct them. I blasted the Auditor General of Canada for its flimsy audit of PSP Investments, but the truth is we need better, more comprehensive audits across the board and the findings should be made public.
Another thing I mentioned was maybe we don’t need any central securities regulator. All we need is for the Bank of Canada to have a lot more transparency on all investment activities at all of Canada’s public and private pensions. The Bank of Canada already has information on public investments but it needs more input, especially on less liquid public and private investments.
This is where I stand. I think it’s up to Canada’s large public (and private) pension funds to really make a serious effort in explaining their benchmarks, the risks they take, the value-added and how it determines their compensation in the clearest, most transparent terms but I also think we need independent overview of their investment and operational activities above and beyond what their financial auditors and public auditors currently provide us.
Importantly, there’s a huge gap that needs to be filled to significantly improve the governance at Canada’s large pensions, even if they are widely recognized as having world-class governance.
Finally, I remind all of you that it takes a lot of time and effort to share these insights. I’ve paid a heavy price for being so outspoken but I’m proud of my contributions and rest assured, while we can debate compensation at Canada’s large pensions, there’s no denying I’m THE most underpaid, under-appreciated senior pension analyst in the world!
Francis Bielli, executive director of the Philadelphia Board of Pensions and Retirement, will be serving as the board’s interim chief investment officer, while the board conducts a search for a new CIO.
The board asked Bielli to put on a second hat, following Sumit Handa’s recent resignation. Handa, who was hired in 2011 to manage the investments of the underfunded $5 billion Philadelphia city workers’ retirement plan, is going back to the private sector, said Rob Dubow, pension board chairman and city finance director.
Bielli’s salary will get a $35,000 bump, totaling $204,000, to fill in the second job, the board announced at its meeting Thursday. A national search will be conducted to find a replacement for Handa.
Bielli will oversee the management of $4.7 billion in pension assets.
Photo credit: “GardenStreetBridgeSchuylkillRiverSkylinePhiladelphiaPennsylvania” by Massimo Catarinella – Own work. Licensed under CC BY 3.0 via Wikimedia Commons – http://commons.wikimedia.org/wiki/File:GardenStreetBridgeSchuylkillRiverSkylinePhiladelphiaPennsylvania.jpg#mediaviewer/File:GardenStreetBridgeSchuylkillRiverSkylinePhiladelphiaPennsylvania.jpg
* Manage and monitor workload for investment professional in his/her reporting structure
Minimum Requirements and Experience:
* Bachelor’s degree in business administration, economics, finance, or a closely related field
* Five years of broad and extensive investment management experience for a major financial institution or firm, or government agency, including some experience leading or coordinating professional staff, and review of large and varied investment portfolio
* 3 years experience restructuring investment commitments ( private equity or equity strongly preferred, other private market experience such as real estate would be relevant in a commingled fund environment.)
* 5 years experience managing people
* Previous experience working for pension, foundation or endowment fund
* Previous experience leading and mentoring staff
* Ability to work well in a collaborative team environment
* Highly motivated self-starter
CalPERS is the nations largest public pension fund.
Christopher Ailman, chief investment officer of CalSTRS, sat down with CNBC on Tuesday and talked about the “upside potential” of the Japanese market. He also discusses index investing and when to actively manage investments.
The California State Teachers’ Retirement System said it restructured how its investment office is organized and is emphasizing stronger internal controls to pave the way for a shift toward more internal management.
The closely watched $186.4 billion pension fund has previously said in investment policy documents that by managing assets internally, it can have more control over corporate governance issues and the flexibility to tailor strategies to its needs.
Calstrs will focus initially on publicly traded assets as it looks to raise the amount of assets its staff will oversee, Spokesman Ricardo Duran said.
In a signal that fixed income could be emphasized for more in-house management, Glenn Hosokawa was named director of fixed income, while Paul Shantic was named director of inflation-sensitive assets. They were previously acting co-directors of fixed income.
Fixed income made up 15.8% of Calstrs’s portfolio, as of Sept. 30, short of an allocation target of 17%. Inflation-sensitive assets made up 0.7% of pension fund assets; the target allocation for the asset class is 1%.
A new organizational structure “allows us to bring more assets in-house,” said Calstrs’ Chief Investment Officer Christopher Ailman in the release.
More details on the newly-created position of “chief operating investment officer”, from WSJ:
Debra Smith was named chief operating investment officer, a new role at the pension fund. She was previously director of investment operations.
Ms. Smith leads a new unit that will tackle issues such as compliance, ethics and internal controls. She will report to the investment committee twice a year, giving her a direct line to board members.
The position builds more separation between investment management and operations at the pension fund, allowing the chief operating investment officer more “structural autonomy,” said Mr. Duran.
CalSTRS has finished a restructuring of its investment staff, and announced Friday it had made three key appointments: the fund hired its first Chief Operating Investment Officer, as well as new directors of Fixed Income and Inflation Sensitive investments.
Debra Smith has been selected CalSTRS Chief Operating Investment Officer (COIO). Glenn Hosokawa was named director of the $22.4 billion asset class, Fixed Income, the funds’ second largest. Paul Shantic was named Director of Inflation Sensitive, the newest and smallest asset class with an investment portfolio at $1.4 billion.
“These three appointments, coupled with our 2010 creation of a Deputy Chief Investment Officer, completes a new organizational structure that allows us to bring more assets in-house,” said CalSTRS Chief Investment Officer Christopher J. Ailman. “This structure matches what you find in most large investment money managers. This also fits our plans to internally manage more of our assets–currently at 45 percent in-house–to a projected 60 percent internally managed.”
All three moved up from high-level positions in CalSTRS. Ms. Smith was director of investment operations. Messrs. Hosokawa and Shantic were acting co-directors of Fixed Income. All three come with deep knowledge and experience in finance and investment management and operations.
CalSTRS’ inaugural COIO, Ms. Smith, has risen through the ranks at CalSTRS from associate investment officer in 1998 to director of investment operations in 2010. She holds a Bachelor of Science degree from Fresno State University in business administration, finance and marketing. In 2012 she received a certificate as a graduate of the CalSTRS Management Academy. Ms. Smith is currently enrolled in the CalSTRS Executive Development Program with a graduation date of November 2014.
“I look forward to collaborating with investment management at CalSTRS and with our strategic business partners to put in place adaptive and innovative solutions to achieve our mission, which is securing the financial future and sustaining the trust of California’s educators,” Ms. Smith said.
More on the fund’s new investment staff structure:
The new structure has the COIO overseeing Investment Operations, Branch Administration, and a new unit comprised of Compliance, Internal Controls, Ethics and Business Continuity. The new position will also directly report to the Investment Committee twice per year. This fulfills a goal of CalSTRS’ internal auditors, who recommended the separation between investment management and investment operations.
“This new structure puts in place a smoother operation for a portfolio of our size and allows for better oversight by the board, the Deputy CIO and myself,” said Mr. Ailman, adding that: “The competition for these positions was very intense and was nationwide in scope, which speaks well for the quality of the talent we have in house.”
Read the entire release, including bios of the three appointees, here.
Ohio PERS has announced that its director of investments, John C. Lane, will be leaving his post to become the chief investment officer at Ohio State University. From the Columbus Dispatch:
John C. Lane is to start work as Ohio State’s vice president and chief investment officer on Oct. 29 after the university’s board of trustees confirms the appointment, according to an OSU news release this afternoon. He has managed investments for the public employees pension system since 2010 and previously managed investments for Eastman Kodak and for the Pennsylvania Public School Employees’ Retirement System.
At Ohio State, Lane replaces Jonathan Hook, who left this spring to take a job managing investments for a nonprofit foundation. Hook was paid $627,300 per year. Ohio State did not immediately disclose what it intends to pay Lane.
“John Lane has demonstrated excellent results throughout his career and I am confident he will lead us to a new level of performance,” Geoff Chatas, OSU’s senior vice president and chief financial officer, said in the news release. “He possesses the expertise to assure that the university succeeds in its responsibility to the public and our supporters to maximize investment returns.”
Lane will report to Chatas in his new role.
Lane will be managing $3.4 billion of assets for the University.
A recent survey from consulting firm Aon Hewitt suggests that pension funds looking to hire consultants or outsource investment management duties will overwhelmingly consider firms they’ve already worked with over those they haven’t.
This survey comes from Britain—but it’s a safe bet that funds in the U.S. behave similarly.
Pension funds that are contemplating bringing in a fiduciary manager – a single firm to take on most, if not all, active investment responsibilities – are overwhelmingly more likely to employ a firm they already know rather than a newcomer, a survey for consultancy Aon Hewitt suggests.
Only 12% of 125 funds said they would bring in a firm they did not already employ.
In choosing among firms that already worked for them, 59% would go for their consultant and 30% for a fund manager.
Sion Cole, head of client solutions at Aon Hewitt, who is responsible for its £6.2 billion fiduciary business, said: “Fiduciary management has to be built on a level of trust. What we’re seeing is that pension trustees are going out to market, assessing their options and then appointing someone they know and trust to do that job.”
The investment will be placed in the American Century Non-U.S. Growth strategy, which looks for companies with a market capitalization of $3 billion or more, with accelerating growth and improving fundamentals. The overall portfolio typically invests in about 90 to 135 companies.
The investment management team is led by Senior Portfolio Manager Rajesh Gandhi, a 17-year financial services veteran who joined American Century in 2002.
The Arizona State Retirement Systems manage $34 billion in assets for 500,000 members.
Portfolio Manager Rajesh Gandhi explains his investment strategy in this video, courtesy of American Century.