CalPERS Focus Remains on Private Equity After Ben Meng’s Departure

After Ben Meng’s departure from California Public Employee’s Retirement System (CalPERS), the state pension fund is looking to increase its margins by investing more into private equity. Meng worked for over a year at CalPERS where he oversaw a disappointing level of growth, and suddenly left in August 2020 after a private complaint alleged that he had personal financial investments that could possibly be conflicts of interest.

Now CalPERS is focused on reinventing itself—but its continual emphasis on a 7% return rate is harming the opportunity for reflection. CalPERS is a $410 billion fund that has historically run far short of its goals. In just the last few weeks, CalPERS announced its intention to focus more of its investments in private equity as both a response to the low interest rates offered in the bond market and as a result of its unyielding pursuit of high returns to make up for an ever-increasing funding shortfall. Despite this, data on CalPERS current investments in private equity—around $80 billion—show that even they are hitting a low benchmark in terms of returns.

“[Private equity] helps us achieve our 7 percent solution. I know we have to be there. I wish we were 100 percent funded. Then, maybe we wouldn’t,” Theresa Taylor, chair of the CalPERS board investment committee said in a meeting. CalPERS aggressive target of 7% growth has led them to rely more on these types of investments. The fund itself has explicitly noted that private equity and distressed debt are the main ways to make it happen. Meng was hired to increase investments in private equity, and it appears the new Chief Investment Officer will likely be asked to do the same.

Instead of continually raising the rate of expected return to make public pensions look good on paper, CalPERS needs to seriously consider lowering its estimated targets. Estimating such a high rate of return makes it easy to appear like the fund is on track, as well as to foot lower bills to the state and cities. Many economists say that public pensions such as CalPERS should be using return rates more correlated with those of risk free bonds which would provide a more accurate and stable return estimate. 

Using a return rate of 7%, however, is only realistic when the funds are invested in high risk assets like private equity. This becomes troubling when considering public pensions’ role in serving retirees who are owed their pensions. Pensions such as CalPERS need to seriously evaluate how they got into this position in the first place—and be more honest about their expectations for the future of the fund. Only then can they begin to take serious steps to solve the long term problems the fund faces.