CalPERS Lambastes $180 Million in Placement Agent Activity

(March 15, 2011) — The $228 billion California Public Employees’ Retirement System (CalPERS) has issued a report detailing the use of placement agents, or middlemen that connect money managers with pensions and highlighting that there may have been influence peddling by a former CEO, Board members, and investment staff.

While placement agent activity is not illegal, recent scandals involving public employee pension funds around the country have placed a spotlight on the industry, leading many funds to reassess their relationships. Worries about lack of disclosure in the pension fund community exploded last year when a pension-fund scandal in New York exposed the role of placement agents in bribery and corruption charges. In May 2010, California’s attorney general filed a civil lawsuit that alleged CalPERS officials — Fred Buenrostro, a former chief executive, and Alfred Villalobos, former board member turned placement agent — participated in a scheme to obtain business for investment firms, providing pension officials with luxury trips and other gifts.

The CalPERS report asserts that while at the giant pension, Buenrostro repeatedly “inserted himself in the investment process in a manner inconsistent with prior practice at CalPERS, pressing its investment staff to pursue particular investments without evident regard for their financial merits.”

“On behalf of the CalPERS Board of Administration and every individual that works here to protect the interests of all of our members, we condemn in the strongest possible way the apparent misconduct described in this report,” says Rob Feckner, president of the CalPERS Board. He continues: “We commissioned the special review to find out what happened and we now have many answers. We have institutionalized more than a dozen new reforms and policies to guard against future wrongdoing, and the special review has identified additional policy changes that will be coming. Today we dedicate ourselves to pursuing all of the appropriate policy changes and all of the remedies available to us to both hold accountable the wrongdoers and prevent future misconduct. Let this episode in our history never be forgotten, that this report should remind today and tomorrow’s stewards of CalPERS that ours and theirs is a sacred trust, one that should never be allowed to be compromised for personal gain or outside interests.”

Commissioned in the fall of 2009 to review the fees paid by its external managers to placement agents, the review, conducted by the Steptoe & Johnson law firm and adviser Navigant Consulting, outlines the following four new policy recommendations:

1) Any ethics-related proposal before a Board Committee must be decided by no later than the third regular committee session after its introduction. If it fails to meet the deadline, the proposal must go before the full Board at its next meeting.

2) Providing additional training to Members of the Board on the requirements to ensure all CalPERS-related business is decided at publicly-noticed meetings.

3) Developing policies to better address the risks associated with Members of the Board who are experiencing serious financial difficulties.

4) Adding additional policies and procedures to minimize the risk of inappropriate sharing of sensitive CalPERS information with individuals outside the system who might benefit from that information, who may include individualized coding of documents.

The report follows California Controller John Chang’s decision last month to sponsor two new bills aimed at tightening lobbying restrictions for the nation’s two largest public pensions — CalPERS and the California State Teachers’ Retirement System (CalSTRS). Chiang indicated in letters to officials from CalPERS and CalSTRS that as a result of the placement agent scandal, the public has lost confidence in the way public funds around the country are being handled. According to the comptroller, the bills would place a cap on the amount of gifts members and staff may receive each year, requiring a pension fund board member or employee to wait two years after leaving before working with a firm that has business with the funds.

Separately, a CalPERS panel today voted to keep the system’s assumed rate of return at 7.75%. CalPERS Chief Actuary Alan Milligan recommended that the pension fund adopt a lower discount rate at 7.5 percent, but indicated to the Committee that keeping the rate unchanged was prudent. “As pension fund administrators, we want to make sure CalPERS remains financially sound over the long term,” said CalPERS Chief Actuary Alan Milligan in a statement. “The discount rate adopted is reasonable and achievable, and appropriate for funding the promised benefits.”