By GILBERT CHAN
Tuesday, January 23, 2007
The nation's largest public pension fund is getting into the financial services business.
Looking to boost fee income and build off its global reputation, the influential California Public Employees' Retirement System unveiled Monday an ambitious three-year plan to offer its own lineup of investment products for local government workers with the potential of rolling out a nationwide program for consumers.
CalPERS plans to introduce its first products in June to 22,600 city, county, school and other municipal employees who participate in a voluntary 457 personal retirement plan that CalPERS manages for 582 public agencies across the state.
While these employees _ and state workers _ already have their government pension money invested by CalPERS, this new initiative gives local government workers access to the fund managers' expertise in their personal retirement accounts.
The money managers will be able to create a type of mutual fund by tapping into the wide breadth of investments already in CalPERS' $225 billion portfolio _ from international stocks to real estate to corporate bonds.
"We're trying to leverage our expertise with our business lines. There are a lot of opportunities," said CalPERS chief executive Fred Buenrostro.
The 457 savings program _ named for its number in the federal tax code _ has about $614 million in assets and is designed to provide retirees with extra income to supplement their normal pension benefits. The savings program currently offers about a dozen mutual fund choices.
In the long run, CalPERS' leaders envision broadening the fund's reach in the public and private consumer market, offering an assortment of investment funds and services, including investment advice _ if they can do so without jeopardizing the fund's nonprofit status.
"They're such a market leader as a pension fund there's no reason to believe they can't pull it off," said Conrad Ciccotello, a professor at the Robinson College of Business at Georgia State University. "They've done so well with everything they've done in money management."
CalPERS Chief Investment Officer Russell Read expects to be able to offer investments at a relatively low fee while capitalizing on the staff's vaunted investing reputation. In 2005, the latest year for which returns are available, the CalPERS staff finished with an overall investment return of 11.2 percent, compared with 3 percent on the Standard & Poor's 500.
"We are not looking to be another Fidelity or Vanguard fund," Read told trustees attending their annual winter retreat at the Embassy Suites in Napa. "We have a tremendous investment capability."
CalPERS trustees urged officials to move slowly, citing myriad pension and securities legal issues that need to be sorted out before the fund could move with an expanded statewide, or even national program. Some board members said they did not want to jeopardize the fund's tax status for members.
"We're going to look at it very cautiously," said Charles Valdes, chairman of the CalPERS Investment Committee.
Yet, the concept is enticing to CalPERS _ as both a revenue source for fees and a way to evolve into a quasi-financial services advisory firm.
Moreover, if public pension critics succeed in advocating for self-directed private investment accounts, or direct contribution plans, CalPERS would be ready with investment options for state workers.
In the past, Gov. Arnold Schwarzenegger has supported efforts to change the traditional guaranteed pension plans to include private accounts, which allow beneficiaries to direct their investments.
"I'm very excited about this vision," said Trustee Priya Mathur. "It's important we be a significant player in increasing the savings rate in this country."
Read said the fund would tap its 180-person investment staff and outside managers to develop the investment products. In the future, CalPERS would have to hire more workers to market the program and provide investment counseling.
Buenrostro said the fund will conduct a customer survey to gauge interest in such investment products.
"We're not going to build something that nobody wants," Buenrostro said.
