Investigation Launched into CalPERS

A group of retirees in California has kicked off an independent probe into the largest public pension system in the U.S., raising questions about its investment strategies and transparency levels.

Thanks to a fundraising effort, the Retired Public Employees Association (RPEA) has garnered over $181,000 for this inquiry into CalPERS’s approach to private equity and the fees associated with money managers. While some funds come from individual donors, a significant portion originated from RPEA itself.

The funds will be used to hire Ted Siedle, a seasoned pension writer and financial investigator, known for conducting previous audits that have stirred up tension between state pension fund managers and retiree organizations.

RPEA President Margaret Brown expressed her concerns that CalPERS might be withholding vital information from its members, hoping this inquiry might lead to the establishment of a new inspector general’s office for better oversight of the retirement system.

One key focus of the investigation is whether the $587 billion pension fund is paying excessive fees to private equity investors and if greater transparency is required for those transactions.

Terry Brennand, who directs revenue, budget, and pensions for SEIU California, acknowledged that private equity fees can be steep but believes the returns CalPERS secures on those investments, even after accounting for the fees, justify the costs.

“Yes, we’re paying high fees, but that’s simply the nature of the market,” Brennand commented.

He also noted that, while private equity does lack the transparency of other assets held by CalPERS, that’s often inherent to investments in non-publicly traded companies. As the nation’s largest pension fund, CalPERS has pushed for improved transparency from private equity firms and managed to achieve a more favorable fee structure than many other investors.

Investments in private, non-listed companies have been profitable for CalPERS. In the last fiscal year, the fund reported a preliminary overall return of 11.6%. Within that, private equity outperformed many other investments with a 14.3% return, while public equity fetched a net return of 16.8%.

Since 2022, CalPERS has nearly doubled its investments in private equity, increasing from $50 billion to $92 billion.

“CalPERS is recognized nationwide as a leader in transparency and is considered one of the most open pension systems globally,” stated CalPERS spokesperson Mary Lynne Vellinga.

Vellinga mentioned that CalPERS conducts annual surveys of about 75,000 members to assess its effectiveness in serving them, consistently ranking in the 80th to 90th percentile for fund management and member communication.

Siedle’s Controversial Background

Siedle, a former SEC lawyer, has a history of investigating pension funds and has critiqued many for conflicts of interest and high fees. He asserts that increased transparency in public pensions is beneficial.

“We’re working to ensure that these pensions are sustainable and well-managed,” he remarked during an interview.

However, Siedle’s reputation is somewhat contentious. His critiques have attracted backlash from officials in states where he’s questioned the safety of retirees’ benefits.

About ten years ago, he was called upon by a North Carolina employee group to investigate its pension fund. In 2014, both the state treasurer and the chief investment officer remarked that Siedle’s report contained numerous inaccuracies and unfounded claims.

More recently, his 2021 investigation into Ohio’s State Teachers Retirement System sparked concerns over underperformance, leading the Ohio retirement system to argue that many conclusions in the report lacked solid backing.

Siedle understands that his findings might not be well received, and he isn’t predicting any different outcome with CalPERS. Nevertheless, he noted that certain pension funds, like one in Minnesota, have adjusted their practices following his reviews.

He anticipates finalizing this investigation between January and March of next year.

Funding and History of the Investigation

This is not RPEA’s first attempt to initiate an independent review of the pension system; in 2022, it unsuccessfully sought legislative backing for a management audit by the state auditor.

Earlier this year, the group initiated fundraising for Siedle’s independent investigation, initially aiming to gather $350,000. However, when that didn’t pan out, Brown negotiated a lower cost of $250,000 for the investigation.

Records show that RPEA and its chapters contributed over $149,000 to the total raised, which constitutes approximately 82% of the funds collected so far.

Brown had hoped that more affluent members or concerned community members would step in to help fund the investigation, but when that didn’t happen, the board decided to cover most of the expenses.

“The goal isn’t to alarm retirees but to address ongoing concerns with CalPERS and their returns,” she stated regarding the inquiry.

If the investigation concludes without revealing transparency issues or questions about the fund’s viability, Brown mentioned she would celebrate that outcome and drop any related concerns. Still, she doesn’t anticipate that scenario.