Who would need the highest funding job at California’s pension fund?

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Ben Meng’s abrupt departure from the California Public Staff’ Retirement System has opened up one of many highest-profile funding jobs within the US. However individuals near the pension fund don’t count on hordes of Wall Avenue’s finest and brightest to be beating down the door to take the reins of the $405bn-in-assets fund.

Attracting high expertise is usually laborious for public funds within the US, the place the pay sometimes pales compared with what a fund supervisor could make within the non-public sector. But, Calpers’ issues transcend remuneration. 

The fund pays higher than most. As chief funding officer, Mr Meng made about $700,000 a 12 months and was eligible for a efficiency bonus of $1m-plus, in accordance with Calpers. However in trade for that pay cheque, the brand new chief funding officer will enter a political stress cooker and face the mighty activity of delivering 7 per cent returns 12 months after 12 months.

Calpers’ predicament is an instance of a wider disaster brewing within the US pension market, the place underfunded public funds have set unattainable funding objectives that they have to hit to pay what they owe to retirees. The issue is compounded as a result of many states have banned profit cuts for current retirees. Funds comparable to Calpers are sometimes unable to set extra practical returns targets with out triggering large contribution necessities that might squeeze the budgets of the cities and states by which they function. 

Mr Meng, who took over as CIO in January 2019, stepped down this month, changed on an interim foundation by Dan Bienvenue, his deputy.

His exit got here shortly after the weblog Bare Capitalism alleged that he had not correctly disclosed his personal financial pursuits, as required by the state of California. On August 6, Mr Meng instructed the Monetary Instances that he had disclosed all of his monetary holdings on the relevant kinds and declined additional remark.

Jay Wierenga, communications director of the California Truthful Political Practices Fee, mentioned the division had opened an investigation into Mr Meng’s disclosures.

Nevertheless, even earlier than this scandal got here to gentle, some Calpers insiders believed Mr Meng’s days had been numbered due to the fund’s lacklustre efficiency. In July, the fund introduced it had returned 4.7 per cent for the earlier 12 months. Mr Meng additionally discovered himself beneath the microscope over a call to go away a so-called tail threat technique that supplied insurance coverage in opposition to a crash and would have paid out handsomely in March.

“My learn is he was given marching orders to get 7 [per cent returns] come hell or excessive water,” mentioned an individual near the fund.

Calpers mentioned that whereas final 12 months’s return goal was missed, the fund “did beat our benchmark and outperformed most pensions funds”.

In June, Mr Meng floated a scheme to lever up the fund to the tune of $80bn to take a position extra closely in non-public fairness and personal debt. That proposition was met with opposition from a member of the fund’s board and native officers, who deemed it too dangerous. The CIO had beforehand introduced an intent to go huge on non-public markets in 2019, which additionally drew some scepticism.

The vast majority of the Calpers’ board nonetheless helps Mr Meng’s funding plan and intends to implement it even in his absence, mentioned Calpers.

Calpers’ return targets have not kept pace with interest rates.

Mr Meng is just not the one investor to search for returns in new locations: the common US public pension fund’s publicity to different belongings grew from 7 per cent in 1990 to 29 per cent in 2019, in accordance with Morgan Stanley. 

This shift happened in opposition to a backdrop of falling rates of interest, which pressured these traders to start out including threat to maintain up with their future liabilities. It could have been prudent for pensions to start out reducing returns targets as charges dropped, however that didn’t occur.

The dotcom bubble of the late 1990s saved issues wanting rosy for some time. However actuality has since set in, with the hole widening between what these funds owe and what they’ll afford to pay out over time.

The final time Calpers had sufficient belongings to completely cowl its future funds was 2002. At this time, it’s effectively behind its goal with a funding ratio simply north of 70 per cent.

Calpers (like many different public funds) is now bringing its funding objective nearer to actuality, trimming it from 7.5 per cent in 2016 to 7 per cent at this time. Extra drastic cuts will certainly be crucial. From 2001 to 2019, the S&P 500, for instance, has supplied common annual returns of simply 5.9 per cent.

But because it stands, the brand new everlasting CIO shall be caught between a rock and a tough place, identical to Mr Meng. Barring some funding luck, a metamorphosis within the rate of interest outlook, or a extra forgiving objective, it won’t be lengthy earlier than Calpers is out searching for the successor to Mr Meng’s successor.

billy.nauman@ft.com

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