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The Global Pension Transparency Benchmark, a collaboration between conexust1f.flywheelstaging.com and Toronto-based CEM Benchmarking, has revealed the need for serious improvement in pension transparency across the globe. Check out how funds ranked across 15 different countries on transparency of governance, performance, cost and responsible investing.

The GPTB ranks 15 countries on public disclosures of key value generation elements for the five largest pension fund organisations within each country. The overall country benchmark scores look at four factors: governance and organisation; performance; costs; and responsible investing; which are measured by assessing hundreds of underlying components.

Overall the transparency of disclosure varies greatly, both between countries and between funds, across all the factors that were measured. In some instances there are wild variances between the best and worst performers.

Pension funds around the world scored best on performance disclosure, followed by governance, cost and responsible investment. But only performance could be considered a decent score (average country score of 68).

While some countries and funds scored well on certain factors, on average transparency of disclosure needs improvement.

Principal at CEM Benchmarking, Mike Heale, who led the project says the benchmark has highlighted the areas where improvement is needed.

“We found quite a remarkable range for both what was disclosed and the communication quality. Individual fund total transparency scores ranged from 18 to 82. The highest scoring funds generally covered all factors well and provided many best practice examples that we have highlighted,” he says. “However, we were disappointed with the overall global results. All too often disclosures for responsible investing, costs, and governance were non-existent or minimal. Transparency builds trust. It is the right thing to do and the smart thing to do. There is much room for improvement.”

Analysis of the results showed that certain countries, and pension funds, dominated each of these four factors.

Within costs, the Netherlands was a clear leader. Within governance, the Canadians shone. When it came to performance transparency, the United States was the leader. And within sustainability, Sweden was the outlier, although all the Nordic countries performed well.

The wildest variance was in the disclosure of governance (0-97) and responsible investment (0-88).

The cost factor

The average country cost factor score was 51, with individual fund scores ranging from 18 to 88.

As indicated by the score range, cost factor disclosures varied considerably. Disclosures were better when the pension fund was a single purpose entity rather than one component of a larger organisation such as a wealth management company or a governmental department.

The Netherlands stood out way ahead of the pack with the highest country score of 83, and a tight range of 71 to 88 within the funds from that country. In fact, the top four cost factor scores were held by Dutch funds. The next closest country was Canada with an average of 69.

While the Netherlands dominated, best practice in cost disclosure could be seen across other funds as well. The Royal Bank of Scotland Group was one example, as it supplements financial statement costs in its annual report and provides stakeholders with an analysis of their total investment management fees.

The governance factor

The average country score for governance was 53 out of a possible 100. The biggest Canadian public funds collectively have a global reputation for superior performance, and governance excellence is often cited as a key driver. The fact that the five largest Canadian funds had the highest average score for governance and organisation also supports their collective reputation for governance excellence.

This factor had the largest range within countries from a low of 0 (Mexico, which did not disclose any governance materials) to 97 (Canada).

While the Canadians were clear leaders in governance transparency, there were some other very good examples of best practice including Danish fund ATP’s clear disclosure of its board competencies and skills.

The performance factor

The average country score was 68 and the average country scores ranged from 51 to 87.

Disclosures were generally comprehensive for the current year and at the total fund or investment option level. But there was minimal or missing data for longer time periods and asset class results. Components with the highest scores included asset mix and portfolio composition and risk policy and measures. Components with the lowest scores were asset class returns and value added and benchmark disclosures.

Best practice examples can be seen in the US funds CalPERS and CalSTRS but also the Canadian fund, Caisse de depot et placement du Quebec.

The responsible investment factor

The average country score was 41 out of 100, the lowest average score compared to the other three GPTB factors. Responsible investing also had the greatest dispersion among average country scores as different countries are at different stages of implementing responsible investing and providing disclosures. The average country scores ranged from 2 to 73. Best practice among the funds can be seen in the Finnish fund Elo’s annual report and the Norwegian Government Pension Fund Global responsible investing report.

For all the results and analysis click here.

Comprehensive, holistic value disclosures and compelling communication are key benchmarks for pension funds. This has been confirmed by the first year experience working with leading global pension funds for the Global Pension Transparency Benchmark, a collaboration between Top1000funds.com and CEM Benchmarking. In year two, in recognition of this belief and communication excellence, we have decided to award bonus points to funds preparing <IR> Framework integrated annual reports. Mike Heale looks at four examples of pension funds already using the <IR> Framework.

Comprehensive disclosures and compelling communication are a winning combination for pension funds.

Transparency and effective communication are two critically important success factors for pension funds. Together they are a winning combination that help to build trust, improve strategic focus and clarity, enhance stakeholder relationships, increase engagement with plan members and employees and drive better outcomes.

Pension funds have two readily accessible opportunities for improving their transparency and communication quality:

Utilize the Global Pension Transparency Benchmark
Adopt the <IR> framework and prepare an Integrated Annual Report

About the Global Pension Transparency Benchmark

The Global Pension Transparency Benchmark (GPTB), a collaboration between Top1000funds.com and CEM Benchmarking, was launched in 2021. The GPTB is a world first for pension fund disclosure, bringing a focus to transparency in a bid to improve pension outcomes for members. The public disclosures of key value generating elements for the five largest pension organisations across 15 countries were reviewed in the inaugural annual assessment.

The GPTB framework examines four high-impact value-driving factors: governance and organisation, performance, costs, and responsible investing, which are scored by assessing almost 200 specific components.

The reviews cover fund websites, annual reports, financial statements, and various other published documents. Disclosures are scored objectively, mainly using yes/no answers related to what is disclosed/not disclosed.

Disclosures related to performance results are scored but the relative outcomes themselves are not scored. Clearly, outcomes are important. However, it is not useful to compare them across funds globally because of differences in plan types, organisational mandates, and regulatory frameworks.

In developing the GPTB framework, we recognised that disclosure quality cannot be completely captured by simple objective questions. Communication quality – clarity, cohesiveness, brevity, plain language, use of infographics – is difficult to measure objectively, but it is vital to ensure that key information is read and understood by stakeholders. Therefore, we decided to highlight communication quality through our selection of best practice examples.

Communication quality ranged widely across funds. Some reviews were frankly painful to do because of poor communication quality, even when disclosures and transparency scores were reasonable. In contrast, the communication quality of some of the material we reviewed was outstanding. We found that the small group of funds that prepared Integrated Annual Reports were among the very best.

About the International Integrated Reporting framework and integrated annual reports

The International Integrated Reporting framework and integrated thinking principles have been developed and are used around the world in over 70 countries. The <IR> Framework and Integrated Thinking Principles are now maintained under the auspices of the Value Reporting Foundation, a global non profit organisation that offers a comprehensive suite of resources designed to help businesses and investors develop a shared understanding of enterprise value—how it is created, preserved, or eroded. The resources—including integrated thinking principles, the Integrated Reporting Framework, and SASB —can be used alone or in combination, depending on business needs.

The main goal of an integrated annual report is to concisely explain to all stakeholders how an organization creates value over time. The value paradigm is holistic. It includes internal value creation factors as well as external environmental and social impacts. The <IR> Framework defines six capitals – financial, manufactured, intellectual, human, social and relationship and natural – as stocks of value that are increased, decreased, or transformed through the activities and outputs of the organization.

The <IR> Framework is now applied by a wide range of organizations – corporations, non-profits as well as pension funds and other asset owners. It takes a principle‑based approach. Here are the seven guiding principles that shape the content and presentation format of an integrated annual report.

Strategic focus and future orientation – insight into strategy and how it is intended to create value in the short, medium, and long term.

Connectivity of information – a holistic view of how internal and external factors interact and impact value creation over time.

Stakeholder relationships – insight into the nature and quality of the relationships with key stakeholders.

Materiality – focus on what really matters.

Conciseness – brevity drives focus on what really matters. The pension fund integrated annual reports featured in this article averaged 88 pages. Some of the annual reports reviewed for the GPTB were over 200 pages.

Reliability and completeness – balanced and accurate presentation of all material matters, both positive and negative.

Consistency and comparability – present information consistently over time and in a format that facilitates comparisons with similar organizations.

Pension fund disclosure examples

In keeping with the adage that a picture is worth a thousand words, below are disclosure examples from four pension funds that prepare integrated annual reports. We have highlighted how these disclosures align with <IR> Framework requirements, principles, and effective communication generally, as well as how they incorporate some of the key disclosure elements specified in the GPTB.

Old Mutual SuperFund Integrated Annual Report 2020

Old Mutual, a South African fund, provides a clear, plain language one page summary of its integrated annual report that includes:

Report scope, principles, and approach
Key material issues covered in the report
The six capitals and how they apply to Old Mutual and its stakeholders

Cbus Annual Integrated Report 2020

A concise and impactful report means presenting high-level summary information and not drowning the reader in detail. Best practice is to direct the reader to other sources for additional detail, as Cbus, an Australian pension fund, has done here and throughout its report.

Elements scored in the GPTB framework that are referenced on this page:

Governance
Responsible Investing
GRI and TCFD integration
Financial and performance information
Independent external assurances over the report

Another excerpt from the Cbus integrated report provides a one-page summary of key performance results. What we liked:

Member and Employer satisfaction scores for current and past year
Investment performance across multiple time periods: from current year to 20 years
Relative performance context is provided via comparisons to comparable industry ‘benchmarks’.

Sentinel Retirement Fund Integrated Annual Report 2020

Sentinel, another South African pension fund, included cost reporting in its integrated report that scored highly in the GPTB framework:

Plain language description and inclusion of key cost components
Discussion of costs outside the financial statements
Presentation basis and comparability
Trend analysis

Eskom Pension and Provident Fund 2020 Integrated Report

Eskom, yet another South African fund utilizing an integrated report, included a Governance section that scored highly in the GPTB framework. Here is an excerpt. We especially liked their clear and concise reporting on:

Role and structure of the Board
Committee structure and responsibilities
Board and committee member bios including relevant qualifications and experience
Meetings held and attendance records

The GPTB and communication quality

Work is now under way on the second iteration of the Global Pension Transparency Benchmark, which will launch in early 2022. Our year one experience and interactions with leading global pension funds has confirmed our belief that comprehensive, holistic value disclosures and compelling communication are key benchmarks for pension funds. In year two, we have decided to award bonus points to funds preparing <IR> Framework integrated annual reports, to recognise their communication excellence.

To learn more about the pension funds and integrated annual reports featured in this article, visit these websites:

Cbus

Eskom Pension and Provident Fund

Old Mutual SuperFund

Sentinel Retirement Fund

The Future Fund, Australia’s A$196.8 billion sovereign wealth fund raised its risk profile in the year to June 30, resulting in the fund’s best-ever one-year result of 22.2 per cent.

In the past quarter public equities allocations across domestic, global and emerging markets all increased 35.8 per cent of the fund. And private equity allocations increased from 14.6 to 17.5 per cent from March to June 2021.

The risk on came from deploying cash which shifted from the target weighting of 18.6 per cent at the end of March to 13 per cent at the end of June, which was still above the 11.9 per cent weighting a year earlier.

In an interview in March the fund’s CIO, Sue Brake said that the cash allocation is not about risk aversion but about risk management – and the risk of not achieving the fund’s mandate is the primary risk it faces.

The Future Fund has a return target of CPI+ 4-5 per cent and has outperformed that since inception in 2006. In the past year the 22.2 per cent outperformed the return target of 7.8 per cent by nearly three times.

But the Future Fund chief executive, Raphael Arndt, says over the medium-term returns are going to be harder to produce, particularly given the shifts in the investment environment created by the COVID pandemic.

While risk has been added via listed equities markets, Arndt says over time the fund will increase its focus on skill-based and less liquid opportunities where the fund and its partners can create value.

Some persistent macro themes have been behind the Future Fund’s investments and have been driving some of the more than 30 transactions the fund has participated in the past year. This includes taking advantage of some very cheap pricing in inflation, diversifying away from the US dollar, and adding more currencies and it now has much lower exposure to any one currency risk. It also made an allocation to commodities for the first time.

In addition, Brake told Top1000funds.com the listed tangible markets – in infrastructure and property – looked cheap compared to equities and the fund took a large position in those.

In particular the fund made a further investment into Powering Australian Renewables, and a new partnership with Telstra InfraCo Towers.

Brake says the Future Fund has more interest in anything that is uncorrelated to equities, including the alternatives portfolio it is already active in.

Since taking on the job of head of private equity at CalPERS two years ago Greg Ruiz has spent considerable time getting the portfolio back on track, understanding the positions and allocating capital. Now as the fund almost certainly will allocate more assets to private equity as part of a new asset allocation, Ruiz is looking to add to the sectors where the fund is underweight including venture.

For the best part of two years Greg Ruiz, CalPERS’ managing investment director of private equity, has been trying to understand the fund’s private equity portfolio, its allocations, manager relationships and history of performance.

“It’s a very early innings in terms of what we are hoping to do with the program and I have spent a lot of time trying to understand where we are and how we got there,” he told Top1000funds.com in his first media interview. “To have a go-forward strategy we need to be grounded in a deep understanding of the portfolio.”

As Ruiz and the team spent time “pulling apart the portfolio”, two key themes emerged that are now being addressed in order to bring the private equity allocation in line with best practice.

The first of those is consistency.

For the year to June 2021 private equity returned 43.8 per cent for CalPERS, but over five and 10-year reporting periods (to December 2020) the CalPERS private equity portfolio fails to beat its benchmark.

“If you have a look at the absolute performance over long time periods then private equity has delivered for us, but when you look at it compared to benchmarks then we have been way behind,” he says. “When you peel into why that is, one of the key reasons is consistency. If you graph our commitments it looks like a rollercoaster which is the opposite of what we want. And that’s something we are very focused on.”

In particular he says from 2009 to 2017 the level of commitments were slow compared to the fund size and the allocation to the asset class.

“It’s important to understand those dynamics,” he says.

Pacing is much more consistent now and continues to improve. In 2020 the $469 billion fund made 46 commitments totalling $18 billion with an emphasis on low fee separate managed accounts and co-investment.

The activity brings the capital committed in line with the portfolio allocation of 8 per cent; when Ruiz arrived the allocation was sitting at 6.5 per cent.

In analysing the portfolio Ruiz also saw some concentration particularly in large buyouts which makes up 70 per cent of the private equity investments.

“We were also under-exposed or had no exposure to some areas such as middle market, growth, and venture, so there is an opportunity to add more diversification across the portfolio,” he says.

Venture makes up only 1.5 per cent of the private equity portfolio.

Cost efficiency

In addition to the volatility in pacing commitments, Ruiz also saw some improvements to be made in the cost efficiency of the portfolio.

“When you look back at what we have got right and wrong there is a lot we have got right. For one, we have been investors in private equity for over three decades, making our first investment in 1990. And we backed a number of very high quality managers, some we have stayed with consistently for decades and they have added a tremendous amount of value. We have that history and depth of relationship and a team that has been doing it for a long time,” he says.
But the biggest misstep the fund made, he says, is not following the lead of other asset owners when two decades ago they built scale and reduced costs through co-investment.

“We have been in and out, but never did it consistently or at a scale. This has led to a more expensive portfolio, so we have spent time trying to understand that and what led to the consistent performance gap.”

In the past 20 months more than $1 billion in co-investments have been made alongside existing managers.

“This lays out the path forward for us and we have started building out processes and programs to look at diversification and co-investment. It takes time. In some ways we are ahead of where I thought we would be, but it’s going to take a number of years more.”

Like other investors private equity is the most expensive portfolio in mix.

“From a cost perspective we are focused on net returns. And when we think about driving net returns part of that is accessing managers we think will generate higher gross return and part of it is deploying capital to co-investments to see the overall reduction in spread,” Ruiz says.

CalPERS isn’t targeting a specific cost level, but Ruiz says the focus is on all the components that drive returns, including the lever of co-investments which until now has not been used effectively.

Interim chief investment officer Dan Bienvenue says the fund’s public assets are managed at a total cost of 4 basis points.

“If we wanted the fee down we would put everything in public markets but then you wouldn’t get the drivers of return,” he says. “Total fund costs are now around 24 bps and we want to see that number go up due to private market allocations which add value.”

Similarly Ruiz does not target a particular number of managers he wants to work with. Instead he views it more with the goal of building a high conviction portfolio across each of the market segments and asking what the right mix of managers is within those.

“The number of managers is something I’m always aware of but not a metric I’m tracking to. The way we think about it is by market segments we want exposure to as well as geographies and industries,” he says. “We ask ‘is this a manager that has durable competitive differentiation to generate returns across cycles?’ When we use that lens, we see we have a large legacy portfolio now and much of that will roll out over time and the total number of managers will come down. But the core managers may grow as there are areas we have lacked exposures and that will come through new managers.”

Total portfolio

CalPERS is in the middle of an asset liability modelling exercise to set a new asset allocation by June 2022 to meet the return target of 6.8 per cent. Regardless of where the final asset allocation lands, Bienvenue says there will be more private equity, private debt and real assets in the new asset allocation due to their better risk to return profile.

“Private assets have other risks, they are illiquid and there is the aspect of fees. But if we are going to get the returns we need the portfolio to generate it means choosing which risk,” he says. “We don’t have a low risk choice, we want to get exposure to compensated risks.”

He says that CalPERS is focusing on how to deploy capital at scale with cost advantage economics and private equity is an example of that.

“How to do it with conviction managers and with cost advantage economies, that will drive us to meet our return needs,” Bienvenue says.

“Scale is one of our competitive advantages but it is also a double edged sword. It can drive cost economics, but also deploying $500 million won’t move the needle for us from the total fund perspective. The other side of that from a co-investment standpoint is we can be a fund people approach when they have a scale ticket. We want to be positioned as an organisations they can call with a creative or scale situation.”

More stories on CalPERS

CalPERS’ new asset allocation to take on more risk

CalPERS reduces equities universe

The largest pension fund in the United States, the $469 billion CalPERS, is in the middle of an asset liability modelling exercise to set a new asset allocation by June 2022. Chief executive Marcie Frost says it’s the most significant decision the board makes with regard to the investment portfolio and that achieving a return target of 6.8 per will require “pushing everyone’s risk appetite”.

The ALM process, to set a new asset allocation, takes a considerable amount of time and CalPERS is about half way through that four-yearly undertaking. More than half the current board have not been through the process before and getting them fully informed about the capital market assumptions, risks and forecasts is paramount. Most importantly it requires understanding their risk appetite.

“In my opinion we will be pushing everyone’s risk appetite if we are going to achieve 6.8 per cent. We have to be very clear about what that means about taking on more risk,” Frost said in an interview with Top1000funds.com.

The investment team has put together model portfolios that achieve 6 per cent, 6.25 per cent, 6.5 per cent, 6.8 per cent and 7 per cent in a bid to demonstrate what it looks like to take on more risk.

“We are being very deliberate with the board and helping them with understanding the data which they have to make the decision.”

Frost emphasises the importance of this cycle and the team is leading the board through the “most significant decision they make regarding the investment portfolio and how to allocate”.

Four years ago when the fund went through this process the assumed rate of return was 7 per cent. This year that was automatically lowered to 6.8 per cent under the funding risk mitigation policy where the 21.3 per cent 2021 financial year return triggered a reduction in the discount rate.

But the current asset allocation, which four years ago was set to reach that 7 per cent target, would now only generate 6 per cent based on new capital market assumptions, Frost says.

“We will have to take on more risk,” she says.

The most talked-about way to achieve that is by increasing the 8 per cent allocation to private equity, and to use leverage.

Interim chief investment officer Dan Bienvenue has already spent considerable time with the board discussing the multi-faceted nature of risk, liquidity and the difficult market for returns.

The fund’s current asset allocation is dominated by equity risk with an allocation of about 58 per cent in equities. But Bienvenue says risk models estimate the fund has about 90 per cent growth risk.

“We are long equity risk and we are comfortable with that. We don’t have a choice of not investing. Where we invest is the question,” Bienvenue told Top1000funds.com.

“One of the assumptions of the CAPM model is that investors are homogenous when it comes to risk, we don’t believe that.”

In July the new asset liability capital market assumptions were presented to the board. These were developed by consulting with 11 external asset managers and consultants and garnering their views on 10, 20, and 30-year returns. This included AllianceBernstein, AQR, Blackrock, SSgA and PIMCO among others. CalPERS also determines its own internal capital market assumptions.

While there was a range of opinions among the managers, they clearly show that returns will be lower and expected risk will be higher, so the risk and return trade-off will be more costly.

“Everything is expensive,” Bienvenue says.

In that presentation to the board, Sterling Gunn who is managing investment director of the trust level portfolio management program, also outlined that the higher returning opportunities will be in private assets and emerging market equities.

At the September 13 board meeting the different model portfolios developed by the team will be discussed. Those candidate portfolio include asset allocations to achieve assumed rate of returns at 6.25, 6.5, 6.7, 6.9 and 7.1 per cent as well as the risk involved with each. These will also look at using leverage as a diversifier.

Use of leverage

One way the fund proposes to allocate more to higher returning assets is through the use of leverage. This is widely used by institutional investors including Canadian pension funds, various sovereign wealth funds and even some US public funds such as Wisconsin and Indiana, which through the use of leverage allocates 115 per cent of assets.

But for CalPERS, which is under constant public scrutiny, discussions such as the use of leverage require careful diplomacy.

Bienvenue explains that the use of leverage is not just to add to returns but as a diversifier of risk.

“If we take a long-only portfolio and try to achieve a return like 6.8 per cent then you have to put everything into some sort of equity,” he says. “Leverage will allow us to pull some more diversifying assets such as fixed income and real assets, and these are all things we will work through with the board. We will discuss whether we are comfortable trading out one risk, equity, for another in leverage which has financing and operational risks.”

Bienvenue is aware of the sensitivities around leverage and admits some organisations have got themselves into trouble with the use of leverage in the past.

“It will require quite a bit of discussion but there are areas I think leverage is additive and that is as a diversifier. If it is taken too far it’s dangerous.”

But a number of internal organisational changes means that CalPERS is well positioned to implement leverage internally.

“We have laid some foundations over the past five years which has put us in a position to do it at a total fund level internally. We migrated to a centralised total fund perspective on liquidity and leverage and can monitor and address both at the total fund level.”

If CalPERS does decide to use leverage it will be very incremental, Bienvenue says with a pre-determined schedule.

Regardless of where the final asset allocation lands, Bienvenue says there will be more private equity, private debt and real assets in the new asset allocation due to their better risk to return profile.

More stories on CalPERS

Co-investment, diversification drive CalPERS’ PE push

CalPERS reduces equities universe

In the first story of an exclusive series examining investment portfolio innovation at CalPERS, Amanda White looks at the global equities portfolio where the universe of stocks was recently halved.

The public equity allocation of the $469 billion CalPERS is the fund’s largest contributor to returns and also the largest contributor to volatility.

With a huge portfolio and a return target of 6.8 per cent the investment staff at CalPERS are constantly challenged to meet these return demands in a smooth distribution for its two million workers.

The fund is dominated by equity risk with interim chief investment officer, Dan Bienvenue, saying risk models estimate the fund has about 90 per cent growth risk. As it looks to reduce complexity the equity portfolio recently came under review.

“We are long equity risk and we are comfortable with that. We don’t have a choice of not investing, where we invest is the question,” Bienvenue told Top1000funds.com.

The public equity allocation sits at just over half of the fund’s assets (52 per cent) and last year returned 36.3 per cent. Private equity had a greater return at 43.8 per cent but currently only has a 7.6 per cent allocation.

In addition, the public equity portfolio contributes just over 70 per cent of the forecasted volatility.

Managed almost entirely internally (80 per cent) the public equity allocation is split between cap weighted (71 per cent) and factor weighted (29 per cent).

In terms of a volatility contribution by asset class the public equity cap weighted proportion is over half of the entire portfolio at 54 per cent. It is within this allocation, entirely passively managed, that the team recently innovated by significantly narrowing its benchmark.

“Historically we held the entire market, down to 98 per cent of capitalisation, which was about 11,000 securities,” Bienvenue says. “When we ran a number of diversification metrics on that we found we could cut our holdings by half and not impact diversification. It also improves complexity and allows us to avoid some operational challenges, for example around currency, which take time.”

The result was a reduction in the number of stocks in the cap-weighted portion – about 35 per cent of the fund’s entire portfolio – from 11,000 to 5,000 securities in the second quarter of this year.

The factor weighted portion of the equities portfolio is to assist in avoiding drawdowns, says Bienvenue who before taking on the role of interim CIO was managing investment director of global equity.

“One of the assumptions of the CAPM model is that investors are homogenous when it comes to risk, we don’t believe that,” he says. “We put that sleeve in the portfolio because our aversion to significant drawdown is greater than our utility for upside.”

CalPERS is currently undergoing an asset liability modelling process which includes setting assumptions and model portfolios that will best meet the fund’s return targets.

The current portfolio devised four years ago to meet a 7 per cent return target would yield 6 per cent today on revised asset class return predictions.

“We are looking at candidate portfolios for achieving our new target of 6.8 per cent,” Bienvenue says. “We don’t have a low risk choice, but we want to expose the portfolio to compensated risks.”

At the total fund level public assets are managed at the low base of 4 basis points with total costs of around 23 basis points.

The fund has an ambition to increase its allocation to private equity and is investigating the use of leverage.

“If we wanted to just keep the fee down we would put everything in public markets but that wouldn’t get the drivers of return.”

Bienvenue says the use of leverage will not just add to returns but will act as a diversifier.

“If we were to take a long-only portfolio and try to achieve a number like 6.8 per cent we would put everything into some sort of equity. Leverage will allow us to pull some more diversifying assets like fixed income and real assets which are all things we will work through the board with,” he says. “We are looking at our comfort with trading out one risk – equity – for another in leverage which has financing and operational risks.”

More stories on CalPERS

Co-investment, diversification drive CalPERS’ PE push

CalPERS’ new asset allocation to take on more risk