California’s ambitious state-backed, auto-enrolment workplace pension scheme goes live across the Golden State today, along with its pioneering ESG option.
Over the next three years, California-based firms that do not offer retirement provisions for their workers, must offer one through the CalSavers retirement programme.
But how much of that capital – predicted to swell to $98bn in assets over the next 15 years – will flow into the ESG option?
Katie Selenski, Executive Director of CalSavers, admitted to RI that the ESG option along with the two other non-default options will find it a “challenge” to gain traction due to the well-documented inertia of members switching between retirement plan options.
“Knowing what we do about human behaviour,” Selenski said, “it will be a challenge for the other three funds to garner the same levels of participation [as the defaults].”
CalSavers will automatically default to its Capital Preservation fund and after the first $1,000 to the Target Date option, both run by US giant State Street Global Advisors. Neither option has any minimum requirements for ESG (though SSGA itself does integrate ESG).
But the ESG option might not have been included at all were it not for the commitment of the CalSavers board, which at the time included then State Treasurer John Chiang.
The first round of tenders in August 2018 saw State Street win the right to manage four of the CalSavers investment options for at least the next seven years. The ESG option was dropped due to the quality of bids.
Selenski told RI that pricing was the key issue, though the ESG requirements also was a factor.
“We are serving a set of participants that are by and large on low incomes, so it is really important for us to be laser focused on keeping fees low.”
The decision to drop the ESG option, however, was quickly reversed just a few months later following a feasibility study by investment consultant Meketa.
Following that review, the board instructed CalSavers to go back to the market with a second tender, which, ultimately, resulted in Newton Investment Management being appointed, seeing off 19 rival bids.
Selenski told RI that the “most striking thing that changed between the first and second try was pricing”, she added that market had “heard the board’s feedback”.
Newton’s option will be run at cost of 15 basis points, which will be covered by the scheme’s members.
The lowest ESG option costed to CalSavers in the first procurement process was 59 basis points.Julian Lyne, Newton’s Chief Commercial Officer, described its ESG option as a “pooled or mutual fund”, which could potentially be available to other states’ plans. He added Newton has had discussions with some state plans about using it and stated that US interest in ESG is “catching up quickly” with Europe.
The mandate awarded to Newton will run for three years, a time-frame that Selenski said acknowledges that the field of ESG is “evolving rapidly” and gives CalSavers an opportunity to reflect on what the best course is to take on ESG in the next few years.
Newton’s option will be comprised of an active ESG equity strategy and a passive ESG bond strategy, split 60/40, respectively.
CalSavers, which was put forward in legislation by Democrat Senator Kevin De León in 2012 and enacted in 2016, is not the first state backed defined contribution scheme to be launched in the US, beaten by both OregonSaves and Illinois Secure Choice. It is, however, the first to offer an ESG option.
Selenski also told RI that there were a couple of other states “at various stages in the legislative process” on their own schemes.
The state of Connecticut has just closed an RFP for a management contract for its own Connecticut Retirement Security Program.
The Connecticut plan’s CEO, Mary Fay told RI that ESG could “potentially” be part of the consultant search criteria.
Like her predecessor, California’s current Treasurer Fiona Ma sits not only on the board of CalSavers but on the boards California’s public pension funds CalPERS and CalSTRS.
But despite these links there are no plans to collaborate on investments, said Selenski.
“We are always open to learning from other organisations,” she said, but added that CalSavers is “designed to be distinct and accountable to its own board and mission”.
CalSavers has had its opponents since its inception and there is still pending litigation with the Howard Javis Tax Payers Association, a Californian neo-liberal lobby group.
But Selenski said that many of the opponents have now recognised that the legislation is now state law and she added that the plan had done everything it can to accommodate and address employers’ concerns.
On the lawsuit she said, “we had a very favourable decision out of the district level federal court and we are very confident that we are on strong legal ground here”.
She was referring to the U.S. District Court in California’s ruling in March that dismissed the litigation, though there is an appeal under way.