CalSTRS CIO: US pensions should move toward privatization

The challenges of running sophisticated alternative investment platforms beneath government umbrellas – from retaining talent to enduring criticism over private equity allocations – were among topics broached today by a panel of heavy-hitting LPs.

US public pensions must become more nimble as alternative asset classes blur, as well as boost investment staff pay and implement a governance structure akin to Canadian pensions, according to several state pension plans’ top investment officials.

“I run a multi-asset investment management company and instead of doing it as a private corporation, which is probably a really good model, or a public corporation, which is a good model, we’re running it inside a government entity,” said Christopher Ailman, chief investment officer of the $164 billion (€105 billion) California State Teachers’ Retirement System (CalSTRS).

“It obviously doesn’t take a Harvard grad to figure out that’s the wrong business model. You’re fighting uphill all the time,” he told delegates at the Milken Institute’s Global Conference in Los Angeles.

Ailman said US state pensions should follow the example of US universities, endowments or particularly Canadian pensions, which “have all spun off their investment arms as a crown corporation and then own them and profit from them”.

Fellow panelists Joseph Dear, executive director of the Washington State Investment Board, and Robert Kleine, Michigan’s treasurer, stopped short of echoing Ailman but highlighted challenges to running pension schemes the trio characterized as based on models created in the 1970s and 1980s.

“How do you attract top investment talent with civil service wages?” asked Kleine. He noted the State of Michigan Retirement Systems’ private equity head resigned last year to take a position with the University of California for nearly quintuple the salary.

It’s tough getting increases approved as budget-strapped states worry about headline risk, Kleine added.

“These salaries have to go up,” agreed Dear, “but you’ve got to be realistic – public plans are never going to pay private sector wages.”

Dear said the WSIB depends on recruiting people who find satisfaction in creating wealth for teachers and firefighters, but added he did go to the legislature to lobby for pay rises.

“I had sort of two pitches,” he said. “One was ‘Beat Oregon!’ because they had poached one of our staff. And the other was ‘Well you know the CIO should at least make as much as the football coach.’”

He also said the WSIB’s decision last year to increase its private equity allocation to 25 percent, a move he called more in line with endowments than state pensions, has left it open to critiques.

“It exposes us in this current environment to criticism because we look so different and to the political campaigns of critics of private equity as a conspicuous target,” Dear said.

But its 27-year history investing in private equity and its long-term investment horizon allowing it to access asset classes with liquidity premiums, he said, “give us a lot of confidence that this is an advantage”.