What’s Happening with the Pension Fund? -- Part 25
by Charles Schwartz, Professor Emeritus, University of California,
July 2, 2007
>> This series is available on the Internet at
PEEKING BEHIND THE
Seven reports to bring you up to
date on the turmoil over UCRP.
How to Measure Investment Performance
The practice established by The Regents is
that their Treasurer provides a quarterly report on the performance of
their investments for the retirement fund (UCRP) and also for the
endowment fund. The data given there is highly aggregated: one finds
investment returns for each major asset class (Domestic and Foreign
Equities, Fixed Income, etc.) for various time periods (last quarter,
last year, etc.) along with the assigned benchmarks.
A couple of years ago I presented the Regents’
Committee on Investments with some specific suggestions on how this
practice of disclosure could be enlarged and improved: performance data
should be provided for each individual external investment manager;
peer group comparisons of performance should also be provided. I
noted that other pensions funds, CalPERS for example, routinely provide
that level of detail in their published reports.
When those suggestions got no response, I
decided to see what I could do on my own to collect and publish such
data. Assuming that the professional staff in the Office of the
Treasurer (UCOT) did collect and study that sort of data, I made a
formal request for such documents under the California Public Records
Act. The results of that inquiry and subsequent analysis were
then published on my web site on August 23, 2006. See http://socrates.berkeley.edu/~schwrtz/PerfData.html
The most surprising information uncovered was that a majority of the
external investment managers hired by UC (22 out of 40 firms) failed to
meet their assigned benchmarks for performance over the previous year.
Six months later I was able to update that study and found that the
situation had grown worse.
In addition, I collected and published data on
how UCRP’s overall investment performance compared with that of peer
institutions. Some of that looked at how UCRP compared to CalPERS and
CalSTRS over several years (very well in earlier years but very poorly
in recent years). Another batch of data looked at a large
comparison group of large investment funds. See
Once again, one saw middling to poor relative performance by UCRP in
recent years but top rank standing in earlier years (before the Regents
brought in Wilshire Associates and kicked out the former Treasurer
The letter of transmittal from UC headquarters
that provided me with this last collection of data said,
the Treasurer’s Office has moved away
from peer group comparisons and has discontinued its subscription to
the [TUCS] … and has no plans to subscribe to any service
providing peer group comparison information in the future.
This background will be resonating in the
several recent stories reported below.
A Searing Review in a Local Paper
Bay Express is a weekly “alternative” newspaper widely
distributed in this area (which, incidentally, includes the UC
headquarters.) Their May 9, 2007, cover story (“Parsky’s Party,” by
Chris Thompson) is a substantial report on several contentious issues
surrounding the UC Regents’ management of our pension fund.
Rather than trying to summarize it here I will simply encourage readers
to find the article themselves at http://www.eastbayexpress.com
Their May 30 issue has some letters in
response to that article, including a strong set of rebuttals from
Michael Reese, UC’s Associate Vice President for Strategic
Communications. He closes with the startling claim that if the regents
had not adopted the new investment strategy (designed by Wilshire
Associates in 2000), “the UC retirement plan’s assets today would be
approximately $2.7 billion lower … ” The writer of the article
then rebuts that claim, calling it “shameful”; and the June 20 issue
carries a letter from former UC Treasurer Patricia Small, who also
challenges that claim of Reese’s, calling it “disingenuous.”
Lively reading all.
New Conflict of Interest Charges
On May 4, 2007, the San Francisco Chronicle
carried a story (“Union Calls for Closer Look at Finance Experts”, by
Tanya Schevitz) on some new charges of conflict of interest involving
members of the Regents’ Investment Advisory Committee. That is a body
created in 2000 to integrate some outside investment professionals into
the regents’ policymaking. It turns out that members of that body – who
meet regularly with the regents’ own Committee on Investments in both
open and closed sessions – do not file financial disclosure statements,
as do all regents and many other UC officials.
Some of this topic was presented in my last
paper (#24) in this series. However, recent study by Faith Raider, a
research analyst for one of UC’s employee unions (AFSCME 3299), shows a
much wider circle of problematic situations. As reported in the
[John] Hotchkis has served on the
advisory committee about seven years. …[He] retains a 1.1 percent
interest in his former firm Hotchkis & Wiley Capital Management,
which was chosen in July 2004 to manage more than $430 million in UC
Hotchkis was also sitting on the university’s advisory committee in
2005 when a firm headed by his daughter, Sarah Ketterer, was chosen to
manage $311 million in non-equity funds. Ketterer is chief operating
officer of Causeway Capital Management.
[David] Fisher, chairman of the board of Capital Guardian Trust Co.,
joined the advisory committee just months before his company was chosen
to manage $377 million in fund assets.
The Chronicle reported that regents were
concerned and would consider this issue at their next meeting. The
agenda for the May 17 meeting of the Regents’ Committee on Finance
announced an item (F9) scheduled for action on this topic. Remarkably,
the proposed new policy was even worse than the old one, requiring even
less public disclosure. At the regents’ meeting, however, it was
announced that this matter was being put over for later consideration.
An Insider Squawks
At the May 16 meeting of The Regents, I was
surprised when one of the speakers in the Public Comment Period
identified himself as Robert Blagden: he had just recently
resigned as Managing Director for Public Equity Investments in the
Office of the Treasurer of The Regents and he had some complaints to
present; but the short time limit on public speakers did not allow much
One week later an article appeared in the
online publication FundFire
(providing “Institutional and High Net Worth Competitive Intelligence”)
where we learned that three top investment professionals had recently
left UCOT. From “U of California Loses Top Investment
Staff,” by Whitney Kvasager:
Robert Blagden, former managing
director of external investment management, managed 65% of the $72.7
billion system’s total assets for four years until he felt compelled to
leave in March. He says he and two investment officers left because
micromanagement by the recently-appointed treasurer and the 18-member
Board of Regents is so oppressive they couldn’t effectively do their
This article had more detail from Blagden and also a review of UCRP’s
performance and conflict of interest issues. A follow-up story in the
June 5 issue of FundFire
presented UCOP’s response.
The University of California system is
defending itself against criticism of its performance and complaints
about its management. UC Associate Vice President Michael Reese says
that the university is performing well against internally-set
benchmarks and will no longer participate in peer evaluations.
Reese says the number of those who have quit the investment staff does
not “rise to the level of newsworthiness,” and that reports of
investment advisory committee members having ties to firms that won
contracts are not conflicts of interest or ethical lapses.
“It’s a really healthy fund,” Reese says. “Our employees have not had
to pay into it for a good many years.”
But when Bloomberg ranked performance of the country’s 25 largest
endowments last December, UC was second to worst, with 11.6% returns. …
What I found particularly significant in that
UC response was the absence of any rebuttal or denial of Blagden’s
charge about micromanagement by regents into the investment activities
of the Treasurer’s Office. This has serious implications for the
issue of conflicts of interest, as I should explain.
The Regents’ official Conflict of Interest
Policy regarding investment activities states that they, regents, are
only involved in setting broad policies, the detailed implementation of
which is left to the professional staff in the Treasurer’s Office.
… this Policy explicitly separates the
roles and responsibilities of various UC fiduciaries to ensure the
continuance of sound investment practice and the protection against
real or perceived conflict of interest …
The “micromanagement” which Blagden complained about, and which Reese
did not deny, appears as a direct violation of this policy and
amplifies previous concerns about conflicts of interest in the
management of UC’s multi-billion-dollar investment funds. We need to
learn more about this situation.
Joint Governance Proposal
Just recently, the idea has been brought
forward that employees of UC should be actively involved in the
trusteeship and investment management of the UCRP: Joint Governance is
the operative phrase. Such arrangements are quite common in both
the private and the public sectors throughout the nation. For example,
the CalPERS Board is composed of 13 members, six of whom are elected by
and from the membership of that retirement plan.
UC is quite unique in that its employee
pension plan is entirely internal, controlled by The Regents.
Most public universities use their state’s public employee pension
system; and for private universities there is TIAA/CREF.
According to some experts, pension plans with joint governance actually
perform better (in terms of their average investment returns) than
those where the employer alone manages the fund.
At the May meeting of the regents there were a
number of public speakers from UC employees’ unions who advocated this
idea of joint governance; and State Senator Leland Yee has introduced a
bill in the Legislature (SCR 52) which calls upon The Regents to
institute such joint governance for UCRP under its existing authority
to delegate such responsibilities.
At its first formal hearing, before the Senate
Committee on Education, this bill brought out some lively discussion.
The exact language of the bill (which is a Concurrent Resolution and
not binding legislation) calls for fifty-fifty representation between
employer and employees in the management of UCRP. Some Senators pointed
out that they could only support the general idea of joint governance
and that the specific details of the power-sharing arrangements would
have to be negotiated between The Regents and the various other
stakeholders. Senator Yee agreed to some modification of his bill’s
language to accommodate that view; and then the Committee unanimously
approved his bill.
This bill is supported by many staff labor
unions at UC and also by the Faculty Association; the UC administration
has not yet taken an official position, pro or con. It will be
most interesting to watch how this proceeds.
Resumption of Contributions into the Pension Fund
The Regents had planned to restart
contributions into the UCRP fund as of July 1, 2007, thus ending the
“contributions holiday” they had initiated in 1990. The details were to
be worked out in negotiations with employee unions and the plan also
depended upon a commitment from the state to provide an additional $60
million in the coming year’s budget. A crucial detail is how the
payments would be divided between employer and employees. UC’s first
plan was that these should be equal amounts: a target of 8% of covered
payroll to be paid by each party. With the Governor’s
budget failing to provide the $60 million for this coming year, the
scheduled resumption of contributions has been postponed.
As to the division of payments, it is
instructive to look back at how this was done in the past. Over the
last ten years before the contributions holiday (i.e., the 1980’s) the
record shows that the average contribution from the employer (UC) was five times the average
contribution from the employees. (The employer contributions came from
three main sources: State budget appropriations, Federal contracts and
grants, DOE Laboratory budgets.) One argument is that the
previous 5:1 ratio is a precedent that should be followed now;
contrarily, one can argue that financial circumstances have changed a
lot and the old pattern is irrelevant. Another argument is based
on a concept of equity rather than precedence. During the contributions
holiday, employees benefited by not having to pay into the pension
fund, but the employer benefited much more - five times as much.
Therefore, the employer should now pay in much more than the employees.
In recent public statements UC has said that
it plans to seek state funding in the following year’s budget, with
payments into the pension fund to be 11% from the employer and 5% from
employees. Obviously, this is a fluid situation under continuing
A Mystery Brochure
Early on June 19, while surfing the UCOP
website, I happened to come upon, and promptly downloaded, an
interesting file about the UCRP (“retire_plan_bro.pdf”, 2.2
megabyte file, created 6/6/07). This appears to be a glitzy
brochure designed to counteract the idea of joint governance for the UC
pension fund. Some excerpts:
UC’S INVESTMENTS ARE WELL GOVERNED. The
UC investment fund’s safety, security and solid performance, combined
with its high ethical standards, all point to a system that is
remarkably well governed.
UCRP is in good financial health. Its performance for the fiscal year
to date (May 25, 2007) is 18.7%. Recent quarter end performance is
better than the returns of UC’s peers among 150 pension, foundation,
and endowment plans with over $1 billion in holdings.
As of the last actuarial report, the UC retirement plan’s funded ratio
was 104%, compared to other California funds that today are only 85-86%
funded and to others in the nation that are even lower.
Indeed, if UC had continued to pursue its former [pre 2000] investment
strategy, assets today would be approximately $2.7 billion lower. The
reforms enacted by the Regents are clearly benefiting all UC employees
I am tempted to point out the many contradictions and half-truths in
this brochure; but, instead, I will leave that exercise to my readers.
Strangely, when I went back to find this file
later that same day – wanting to send the URL to other interested
people – it seemed to have disappeared. Later on, I typed the
name of this file into Google and she was able to retrieve a copy of it
But I still cannot find a link to it on the ucop web site.