CalPERS suggests indemnification for losses from divestments ordered by legislation

California pension giant CalPERS has suggested looking at the possibility of indemnification for losses due to divestments ordered by legislation.

It comes as a bill (Senate Bill 783, or SB783) is before the California state legislature to create a separate body to evaluate divestment proposals affecting CalPERS and its fellow fund CalSTRS.

In a memo to board members about the issue ahead of a meeting last month, CalPERS’ staff raised the notion that the funds could be reimbursed for losses they make as a result of state ordered divestments.

When CalPERS enacts divestment, it says, the “absence of fund indemnification poses legal and financial risks” which can negatively impact members.

The memo continues: “The policy analysis required by SB783 should also include an analysis of the benefits of indemnifying the retirement funds for potential financial losses associated with this exercise of legislative authority to divest in the public interest.”

The bill is being taken forward by Democratic Senator Richard Pan and CalPERS’ board voted to take a neutral stance on it at the meeting. State Controller Betty Yee, a board member at both CalPERS and CalSTRS, is opposing the bill on the grounds of cost and that it would simply replicate work already being done by the funds’ staff.

The bill as currently drafted calls on the University of California to establish a unit called the Pension Divestment Review Program, at a cost of $2m. An earlier request for the unit to be part of the California Controller’s office has been dropped.

The process, according to Senator Pan, a practicing doctor, would be similar to an existing process used by the California Health Benefit Review Program (CHBRP) to evaluate legislative proposals. It would help establish a process where all divestment proposals could be “objectively analysed” by a qualified actuary and other pension experts.
The CalPERS memo, prepared by CEO Marcie Frost and Deputy Executive Officer Brad Pacheco, explained CalPERS’ divestment policy, saying “the act of pure disinvestment takes away the seat at the table needed to effect internal change”.“Divestment, as an active investment decision, represents a form of active risk-taking that must be considered, first and foremost, within the context of the CalPERS’ Board’s fiduciary duty,” the CalPERS memo continues, in a section describing its concerns about the Pan bill.

“Divestment represents a form of active risk-taking”

It adds that limiting the opportunity set for investments has “generally been shown to have a detrimental effect on performance”. Furthermore, the bill did not address the impact of divestment proposals on the “risk and volatility of the investment portfolio” which ultimately impacts beneficiaries.

On the plus side, the memo sees the proposal giving the legislature the time and data required to properly evaluate divestment proposals, establishing a “dispassionate, analytical method using clear criteria”.

But on the downside, it “potentially marginalizes” the two funds’ “participation and effectiveness in the legislative process in terms of identifying the financial impact, risks and other implications of divestment proposals.”

Open discussion of the matter prompted comments, in a personal capacity, from Edi Birsan, mayor of Concord, northeast of San Francisco. He made the point that cities are the battleground for investment. “We’re the ones who have to deal with the dirty beaches if you have offshore investments. We’re the ones who have to deal with dirty water if we have fracking. We’re the ones who have to deal with hospitals and sick people because of a tobacco investment. We are the direct recipients of the consequences of investments.” He said CalPERS was not an isolated entity but “part of a greater system of responsibility”.

The board meeting also saw how CalPERS is mapping on to the UN Sustainable Development Goals (SDGs) and it received presentations from PIMCO, Hermes and the Rise Fund.