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CalPERS says consultants could do better

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The first-ever publicly released review of California Public Employees Retirement System (CalPERS) board investment consultants has revealed a high satisfaction with the consultants’ honesty, integrity and competence, but much lower satisfaction when it comes to them recommending ways to control fees and costs and proactively bringing new investment opportunities to the board’s attention.

Eleven of the CalPERS board of administration’s 13 members provided responses to a 16-question survey, assessing the consulting firms in three main areas: strategic analysis and recommendations, communication and responsiveness, and overall performance.

Of the consultants included in the evaluation, Wilshire Associates consults on general pension investments, Pension Consulting Alliance consults on real estate investment and on general investment and responsible contractor program issues, and StepStone Group consults on infrastructure.

Private equity consultant Meketa Investment Group was excluded from the evaluation, given its limited tenure in the 2016-17 fiscal year. It was hired in March this year after PCA resigned as private equity consultant in the middle of a five-year contract.

CalPERS budgeted $43 million to spend on consultants in the 2016-17 financial year; about $20.2 million of that was for investment consultants. It paid about $896 million in total external investment management fees, which was a 3.7 per cent decrease on the year before. Reducing fees and costs is a priority for the fund.

In the survey, directors were invited to assess each consultant using a basic five-step scale, where a ranking of five meant a director was “very satisfied” with the consultant’s performance, four meant “satisfied”, three meant “neutral”, two meant “dissatisfied” and one meant “very dissatisfied”. Each consultant’s results were presented separately, and individual directors’ assessments were not revealed.

While the survey revealed general satisfaction with the consultants’ performance in most areas (see table), in two areas there was markedly lower satisfaction, and, indeed, board members explicitly expressed dissatisfaction. However, no directors expressed “extreme dissatisfaction” with any of the consultants.

Two expressed dissatisfaction with Wilshire – which has been a consultant to CalPERS for more than three decades – on the consultant’s performance in recommending ways to control or reduce fees and costs, while one expressed dissatisfaction with Pension Consulting Alliance’s performance on the same measure in real estate, and two expressed dissatisfaction with the firm’s performance on general investment and responsible contractor program issues. Two directors expressed dissatisfaction on StepStone’s ability to control or reduce fees and costs in infrastructure investing.

The CalPERS’s board was also relatively dissatisfied with its consultants’ performance on identifying new investment ideas and approaches and bringing them to directors’ attention.

One director assessed Wilshire’s performance as unsatisfactory in this respect, two assessed Pension Consulting Alliance (real estate) as unsatisfactory, one assessed StepStone as unsatisfactory, and three assessed Pension Consulting Alliance (general Investment and responsible contractor program) as unsatisfactory.

The results of the board’s assessment were released at a CalPERS board of administration meeting earlier this month. The board’s vice-president, Henry Jones, said the consultants “perform an important independent oversight function on our investing activities”.

“Feedback is equally important to help ensure our consultants are meeting CalPERS’s needs,” he said.

Historically the consultants “sent their own evaluation surveys directly to the board”, he said.

“As recently as last year, feedback was collected manually from randomly selected board members and reviewed with each consultant separately in closed session,” he said.

“This year several enhancements were implemented. The survey is administered by CalPERS; feedback is submitted through an online survey; all board members have the opportunity to offer feedback; and the results are going to be shared in open session.

“Additionally, we have asked the ESPD [Enterprise Strategy Performance Division] to administer the survey as a neutral third party.”


Consultant: Wilshire Associates
(general pension Investment)
Pension Consulting Alliance, Inc.
(real estate)
StepStone Group, LP (infrastructure) Pension Consulting Alliance, Inc.
(general investment
and responsible
contractor program)
Area of assessment: Number of directors* “very satisfied” or “satisfied” with consultant’s performance
Key Area 1: Strategic Analysis & Recommendations
Q1: Accurately analyzes issues and provides timely and objective information 10 10 9 10
Q2: Makes clear and relevant recommendations re: policies and guidelines 9 11 10 9
Q3: Recommends ways to control or reduce fees and costs 6 9 4 4
Q4: Helps define appropriate risk parameters and identify mitigation strategies 8 9 4 10
Q5: Makes sound strategic recommendations on portfolio structure 9 8 8 8
Key Area 2: Communications & Responsiveness
Q6: Proactively identifies new investment ideas/approaches and brings them to Board’s attention 4 8 2 5
Q7: Produces high quality reports that are clear and accurate 9 8 9 10
Q8: Clearly and completely answers questions raised by the Board 9 10 9 10
Q9: Identifies and communicates with the board on issues of strategic importance 9 9 8 9
Q10: Effectively evaluates and monitors relevant asset class/total fund developments 8 9 8 9
Key Area 3: Overall Performance
Q11: Thoroughly understand CalPERS’ objectives and constraints 10 10 9 10
Q12: Provides independent, unbiased insight and advice 9 9 9 9
Q13: Acts with honesty, integrity, and competence 11 11 10 11
Q14: Works cooperatively to add value to CalPERS 10 10 9 10
Q15: Fulfills fiduciary responsibility 10 10 9 10
Q16: Clearly understands it works for the Board and with CalPERS staff 8 9 7 9
* Eleven of the 13 members of the CalPERS Board of Administration provided responses.
Meketa Investment Group is not included in the evaluation.
Source: CalPERS Board Consultant Review & Evaluation Project Results – FY 2016-17.

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