Survey Also Indicates that Most Members Rank Maximizing Returns and Funding Levels for Their Pension Fund as More Important Than Investing in Social or Political Causes
CHICAGO, January 4, 2018 – Despite record-setting performance among U.S. equities in 2017, a significant number of U.S. public pension funds remain woefully underfunded. A newly released study by Spectrem Group reveals that most members whose retirement in part depends on the performance of their pension fund are unaware of this performance gap and the risk it poses. The study also reveals a broad gap between how members want their funds managed and the actual approach many managers may be taking.
The study is based on online survey of members across the country, and respondents include individuals whose pension is with CalPERS, the NYC Retirement Systems (NYC Funds) and a “National” group, including individuals from the New York State Common Retirement Fund, the Florida Retirement System, the Missouri State Employees’ Retirement System, The Teacher Retirement System of Texas, as well as a small group from other public pension plans.
“There’s a clear disconnect between pension fund managers, who are testing new investment styles and strategies, and members, who would prefer to see their pension fully funded,” said George H. Walper, Jr., President of Spectrem Group. “Pension fund managers should refocus their efforts on the wants and needs of their investors, prioritizing investment decisions to maximize performance, while limiting votes to shareholder proposals that directly impact their fund and its members.”
With nearly half of members (48 percent) indicating they will rely on their pension for at least half of their retirement income, there was overwhelming support for strong performance from their pension fund:
- Ninety-two percent of members consider their pension fund’s ability to generate returns at or above the fund’s target level to be important or very important, with CalPERS members the most likely to identify this as important or very important (96 percent).
- Ninety-three percent consider the fund’s ability to generate returns at or above overall market performance to be important of very important, with CalPERS members again the most likely to focus on this factor (97 percent).
- Ninety-five percent believe the fund’s ability to effectively manage risk is important or very important.
Members are relatively confident about their level of understanding when it comes to their pension - they believe they are very well or moderately informed about their actual investment return (56 percent); their target investment return (54 percent); the expenses and fees paid (60 percent) and the benefit structure (61 percent). They are less confident in their knowledge of the costs associated with shareholder activism, the composition and investing experience of the fund’s board and the amount of time spent by fund managers reviewing and voting on shareholder proposals.
While members believe they have a relatively high level of knowledge, there’s a clear gap in how much they really know about their pension’s actual performance and funding level.
- Forty percent of members believe their funds have performed in line with the market for the past few years, which has often not been the case.
- Forty-six percent of NYC Funds members believe their pension fund has outperformed the market, when in fact their returns have been below both market performance and their target level.
- Forty-two percent of CalPERS members similarly believe their fund has outperformed the market, despite returns which have been below the fund’s own target level.
- Only 31 percent of members believe their pension is underfunded, when in fact, all respondents’ pensions are underfunded to some degree. Perhaps most notably, 80 percent of NYC Fund members believe their pension is fully funded, when their fund is only approximately 68 percent funded.
Members also lack in-depth knowledge of their pension fund’s portfolio allocations and the riskiness of its investments.
- For example, while more than 20 percent of CalPERS assets are allocated to higher-risk alternative investments, just 14 percent of CalPERS members think that more than 10 percent of the fund is represented by alternative investments.
- Similarly, only 13 percent of NYC Funds believe that alternative investments represent more than 10 percent of their portfolio, when in reality alternative investments comprise 12 percent of NYC Funds’ portfolio.
- More than one-third (37 percent) of CalPERS members want to see their fund reduce the amount they have invested in alternative energy; nearly one-third (32 percent) of NYC Funds want the same.
Fund Management & Voting
An overwhelming majority of members care about their pension fund’s performance above all else, and believe fund managers should act accordingly.
- When asked about fund management, 75 percent of members indicated that the most important issue for fund managers should be to focus on maximizing returns and getting the pension fully funded, while just 14 percent want fund managers to focus first and foremost on advancing social and political causes.
- Of the members who identified returns as the most important area of focus for pension fund managers, 86 percent believe the fund should make decisions to maximize returns, not to advance social or political causes.
- Of the members who identified the advancement of social and political causes as important for management, 90 percent indicated that fund performance is still somewhat or very important.
- Approximately two-thirds of members (63 percent) believe investment managers should focus their time and resources first and foremost on ensuring that investments meet or exceed both the fund’s target level and the overall market performance, while just 11 percent believe managers should use fund resources to advance worthy political and/or social causes.
Members also seek greater transparency from their pensions given that significant costs are incurred by the fund as part of the shareholder proposal voting process. Pension funds receive and vote on thousands of shareholder proposals a year, few of which have majority support, leaving some investors concerned that the time and resources dedicated to this could be better spent elsewhere.
- Nearly three quarters (74 percent) of members feel their fund should abstain from voting on a proposal if it cannot explain and justify its vote. This is especially true of NYC Funds members (86 percent) and CalPERS members (77 percent).
- Eighty-nine percent of CalPERS members are slightly or very concerned that extensive voting on shareholder proposals is diverting time and resources from more important priorities.
- Forty-six percent believe CalPERS may have gone too far with its challenges to companies, with members 71 and over the most concerned about this (51 percent).
- Forty-three percent believe every dollar spent on these activities is one less dollar allocated to leveraging the best investment research available, with members age 31 – 50 most concerned about this (50 percent).
- A full 90 percent of NYC Funds members indicate they are similarly slightly or very concerned that fund management is focused on the wrong issues.
- Nearly half (48 percent) believe NYC Funds may have gone too far with its challenges to companies, with members age 30 and younger most concerned about this (51 percent).
- Forty-one percent believe that every dollar spent on these activities is one less dollar allocated to leveraging the best investment research available, with members age 31 – 50 most concerned about this (45 percent).
- Almost two-thirds (63 percent) of CalPERS and NYC Funds members believe fund managers should focus their time and resources on only those votes for which they can thoroughly analyze the proposal and be well informed, and vote for issues that will benefit the fund’s beneficiaries.
This survey was conducted online between mid- and-late November 2017 and compared CalPERS and NYC Retirement Systems (‘NYC Funds’) against a “National” group, including individuals from the New York State Common Retirement Fund, the Florida Retirement System, the Missouri State Employees’ Retirement System, The Teacher Retirement System of Texas, as well as a small group from other public pension plans. In total, there were 807 CalPERS members, 771 NYC Funds members and 1,687 National members that responded to the survey.
About Spectrem Group
Spectrem Group (www.spectrem.com) strategically analyzes its ongoing primary research with investors to assist financial providers and advisors in understanding the Voice of the Investor.