CalSTRS CIO Proposes Rebranding Corporate Governance Unit

The California State Teachers’ Retirement System (CalSTRS) has been one of the most active US public pension systems in engaging corporations on their environmental, social, and governance (ESG) policies, and a proposed rebranding aims to reflect that message more clearly.

Chief Investment Officer Christopher Ailman is proposing that the name of the “corporate governance unit” be changed to the “sustainable investment and stewardship strategies group.”

Ailman has asked the CalSTRS investment committee to weigh in on the proposed change and the committee is slated to discuss the matter at its Jan. 30 meeting.

“A new image would incorporate the team’s broader concentration on all ESG issues that may impact long-term value and concern the membership,” Ailman said in agenda material for the Jan. 30 meeting.

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The changes at the $214.9 billion pension plan come as CalSTRS brings on a new leader for the unit. Anne Sheehan retired at the end of March 2018 from her spot directing the corporate governance unit, a position she held for 10 years as its first director.

In October, CalSTRS announced that Kirsty Jenkinson has been hired as the director of corporate governance. Jenkinson comes to CalSTRS from Wespath Benefits and Investments in Illinois.

Ailman said in the agenda material that the change in leadership presents an “ideal opportunity to rebrand and reframe the scope of the unit.”

The CIO notes that the corporate governance unit has evolved over the years to include all aspects of ESG in engaging with companies.

“A new brand image also implies a more proactive, action-orientated program focused on long-term sustainability across all of the portfolio, rather than a single topic descriptor,” he details in the agenda material.

CalSTRS is heavily invested in the stock market, and its global equity portfolio was listed at $105.5 billion as of Dec. 31. Its ownership stake in thousands of companies gives the pension plan a large license to challenge companies in its portfolio on ESG issues.

Both CalSTRS and the larger California Public Employees’ Retirement System (CalPERS) were mandated in the mid-1980s by members of the California State Legislature to develop a corporate governance program to protect shareholders’ rights.

CalPERS received worldwide publicity after it took to shaming companies publicly that had poor corporate governance or had poor financial results. In contrast, CalSTRS put its focus on talking to the corporations privately.

Both pension plans expanded their corporate governance focus over time to sustainability issues at companies in their portfolio as well as social issues, such as the pay ratio between the CEO and lower-level employees.

Ailman in the agenda material credits Sheehan with helping CalSTRS move forward.

“During her tenure, CalSTRS moved out from the shadows of the CalPERS program to gain status as a global leader in governance,” he said.

CalPERS also stopped the annual practice of shaming companies publicly, taking the CalSTRS approach of quiet engagement.

Ailman said since 2008, CalSTRS has had a comprehensive ESG policy, an outgrowth of corporate efforts that were once primarily focused on exclusions of companies from the CalSTRS portfolio or divestments.

CalSTRS is the second-largest US pension plan behind CalPERS, which has almost $350 billion in assets. CalSTRS is also the largest educators’ pension plan in the world.

Tags: CalSTRS, Chris Ailman, corporate governance, ESG, Pension

Oregon’s state government is Democratic controlled, with that party in charge of both legislative chambers and the governor’s chair. But one prominent Oregon Republican senator is looking to move state retirement system members into 401(k)-like plans to help patch up its $20 billion-plus funding hole. Luckily for him, he’s got some help from a Democrat peer, who is his proposal’s co-sponsor.

Amid about a dozen bills eyeing changes to the $77.9 billion Oregon Public Employees Retirement System (PERS), roughly half of them, all sponsored by Sen. Tim Knopp, center on shaking up its defined benefit plan. Knopp, who was a small business owner for two decades, is the former majority leader of the Oregon House. He is co-chair of the Senate Workforce Committee, which has jurisdiction over pension matters.

His ally on the bill is Sen. Arnie Roblan, a Coos Bay Democrat who is also a former high school principal and math teacher. He previously was the speaker pro tem of the state House.

This across-the-aisle plan stands in contrast to the partisan warfare over state pension overhauls that rage on in other places, notably Kentucky.

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One of the main measures Knopp is looking to pass would establish a new 401(k)-style retirement plan for new employees. Employers would contribute 10% to the account and employees will have option to kick in an extra 2%. The retirement system’s board would also be required to offer employees a menu of investment choices for their accounts.

“The times of somebody working 30 or 40 years in the same job seems like it’s pretty rare these days,” Knopp said. “People are tending to move around between the public and private sector and 401(k)s are much more flexible and easier to move and to continue to put money into than a defined benefit, which stops accruing when you leave employment.”

With the Dems in charge of the entire state government, Roblan’s help would increase Knopp’s chances of passing the measure. “He’s the chair of a joint committee on student success where there’s a lot of education reforms that are happening this session,” said Knopp. “There is Democrat support out there, so we’re hopeful.”

The two will meet with Gov. Kate Brown next week for an analysis of the bill, both Knopp and Roblan’s offices confirmed.

Oregon’s pension system is 70% funded, which Knopp admits is not a doomsday scenario, but is “a critical moment” for the pension system as the next downturn could create “serious problems” for its status.

“We’re either going to work to reverse that trend, or we’ll blow a hole wide open in it,” he told CIO, citing Illinois as an example. “Basically, they can’t pay it,” he said of the state government’s pension liability.

Additional bills Knopp will try to push through in the current legislative session include workers choosing between the traditional defined benefit pension system or a new 401(k)-style defined contribution plan. He also wants to require the pension system to study options for an early retirement program where workers would collect benefits and work for a little longer with frozen pension accrual.

Another Knopp bill is dubbed a “kitchen sink” proposal that calls for multiple actions, one of which directs employee contributions to support the fund rather than individual accounts. It also makes $100,000 the highest salary that can be used to calculate a pension after Jan.1, 2020, and changes the metric to average a worker’s top five years rather than the current three. The pension calculation factor for service performed would become 1.2% of the final average salary for each year worked.

“That was merely a bill that took several of the concepts we had been working on in the last few bills and put them all together,” he said.

The final Knopp-sponsored bill would force both employer and employee to contribute 3% of salary to supplemental individual retirement accounts, cutting the employer contribution pickup of worker contributions in half.

The 2019 session began Tuesday and ends on June 30. Should none of Knopp’s proposals move forward, the Bend senator is hopeful he can get his ideas passed eventually.

“There are a lot of people that do not want Oregon to devolve into a complete fiscal mess like some states have ended up,” said Knopp.

Oregon PERS will comment on the bills and their potential impacts, according to the pension system’s website.

The fund’s asset mix was 38.7% public equity, 20.8% private equity, 19.78% debt securities, 10.68% real estate, 7.70% alternative equity, and 2.27% opportunity portfolio, according to its most recent comprehensive financial annual report.

Sen. Roblan and Gov. Brown were unable to be reached for comment.

Tags: Arnie Roblan, Oregon Public Employees Retirement System (PERS), Pension, Pension Reform, Tim Knopp