California Public Employees’ Retirement Fund (CalPERS) Chief Investment Officer Daniel Szente announced last week that he would be stepping down from that post effective November 30.
Szente’s decision comes on the heels of a legal battle launched last year by California Controller Kathleen Connell, who wants to cut back compensation for CalPERS’ investment portfolio managers. While these pay cuts would not have directly effected Szente’s pay, he has said that he believes lower wages will hamper CalPERS’ ability retain the experienced management necessary to achieve better-than-average investment returns.
“With this effort to undo our investment portfolio managers’ compensation and the environment that this litigation creates, I have great concerns about the effect on the investment operations over which I am responsible,” Szente said in a prepared statement. After leaving CalPERS, Szente will join San Francisco-based investment management firm McMorgan & Co.
The legal imbroglio came to a head last year when Connell refused to issue paychecks at compensation rates set by the CalPERS board of directors for portfolio managers under Szente’s management. If those rates had been allowed to stand, the pension fund’s top portfolio managers would have been among the highest-paid state employees in California.
The salary CalPERS was paying its portfolio managers was between $88,000 and $105,000. When CalPERS decided to take the law into its own hands and issue checks through a separate payroll system, the state controller sued the pension fund to challenge the action.
A state judge ruled that CalPERS could not pay its top brass more than other state workers. CalPERS has appealed this ruling and is currently awaiting a decision.
In 1997, CalPERS hired an independent consultant to review its hiring practices because, although the pension fund was making offers to qualified candidates, no one was biting. According to Pat Macht, a spokeswoman for CalPERS, the year-long study showed that most candidates were not only declining the offers but searches to fill the portfolio managers’ positions were taking double and triple the time expected. Additionally, the fund had a 14% turn-over rate.
“The consultant found that we had to make our pay more competitive,” Macht said. “Of 88 possible candidates to fill the private equity portfolio manager’s position, 65 declined due to salary. It was then we decided to pay more.”
In light of the lawsuit, it seems the pension fund may have leaned a bit too far to the extreme.
No successor has been named as yet for Szente, however, the court’s ruling is not overturned, or if CalPERS is unable to retain its portfolio managers, it may have to resort to hiring external investment professionals at a greater price than the current cost to employ internal managers, even taking into account the fund’s own compensation rates, Macht said.