Friday Letter CalPERS goes whiter than white

The giant US pension plan now wants to prevent consultants from holding dual roles of imparting advice to the board and making recommendations to CalPERS’ staff.  

This week’s news that the California Public Employees’ Retirement System plans to stop the practice of a consultant making investment recommendations to the board while also imparting advice to investment staff fits with the pension’s desire to be whiter than white.

Ever since alleged wrongdoing involving former board members at America’s largest public pension surfaced in 2008, CalPERS has been keen to clear out all practices that might have even the vaguest hint of poor corporate governance or conflicts of interest. The pay-to-play furore caused it and others to focus on placement agents, but this latest development is aimed at the activities of consultants.

Back in 2009, CalPERS tightened its investment policy to avoid possible charges that the advice it receives from consultants was anything less than impartial. It also decided to ban the potentially problematic practice of its consultants managing money for the pension plan.

Taking that further by preventing a consulting firm from performing two roles at the same time – advising the board on investment decisions and making investment recommendations to staff – is quite another leap. The implication seems to be that, if a consultant is steering the board towards an investment decision but already has recommended it to staff, there is an inherent conflict of interest or at least the roles are blurred.

On closer inspection, however, CalPERS’ decision is not going to send shockwaves through the real estate consulting world.

The more controversial issue of banning consultants that also are money managers is not an issue for CalPERS in real estate. That is because its present real estate consultant, Pension Consulting Alliance, does not offer money management services to CalPERS, and it hasn’t done anything wrong.

And although the latest edict on dual consulting roles at the pension plan looks like bad news for Pension Consulting Alliance, the advisory firm views its project-oriented work for CalPERS staff as temporary in nature. In fact, the move probably will free up the firm to pursue more non-discretionary retainer opportunities, which it sees as its forte. In any case, it is retaining three roles with CalPERS – general pool, real estate consultant to the board and private equity consultant to the board.

In truth, the move seems more about a need to clarify the roles of the board, the staff and consultants given recent changes in strategic asset allocation and its new real estate strategic plan. Under that plan, CalPERS would significantly increase the discretion of its staff to make new investment decisions without the approval of the investment committee or review and comment by the board consultant. In theory, the increase in delegated authority should help staff implement the new strategic plan by allowing it to enter into new relationships for the new components of the real estate program.

The latest decision to separate roles, therefore, is far from a trauma for consultants to CalPERS. Apparently, the pension just recently admitted several more independent fiduciaries onto its real estate bench. While at least one of those also might be a money manager, the firm in question isn’t one for CalPERS. From inquiries made, it seems that consultants in the US are unaware of any of the pension’s real estate consultants still managing money for the system.

It is true that perhaps other institutional investors might adopt a similar stance to CalPERS on dual roles, but the bigger picture is that, on the whole, consultants – be they generalists or small boutiques– currently have enough work to go around. Requests for proposals for real estate consultants are coming out from investors, and there is a healthy mix of workout assignments, specialised mandates and manager reviews out there.

In the final analysis, CalPERS latest move represents little more than a footnote for those involved in the consulting industry.