CalPERS trains sight on GPs’ management of defined benefit plans

  • CalPERS to review treatment of DB plans in ESG reviews
  • $290 bln pension already includes DB questions in due diligence
  • Committee also approves revised PE policy

The California Public Employees’ Retirement System will soon review general partners’ willingness to freeze or alter portfolio companies’ defined benefit plans, CIO Ted Eliopoulos said at the pension’s December 14 meeting.

In November, board member JJ Jelincic proposed CalPERS refuse to enter any limited partnership agreement with a private equity firm unless the GP promised it would preserve defined benefit plans at its portfolio companies.

Many companies froze or suspended defined benefit plans over the last three decades, opting for more affordable defined contribution plans, such as 401(k)s. CalPERS held stakes in funds that owned Boise Cascade and Neiman Marcus, both of which froze their defined benefit plans under private equity ownership.

Eliopoulos said staff did not think the $290 billion pension should prohibit fund managers from changing companies’ pensions. That said, staff does believe treatment of defined benefit plans is worth consideration, particularly in the context of the system’s environmental, social and governance (ESG) policies, he said.

“Our team share the policy concerns around defined benefit plans,” Eliopoulos said at the meeting, adding: “I think what we will find is it really is … very fact-specific and specific to portfolio company [on a] one-by-one inquiry.”

CalPERS already includes a question about defined benefits plans in its due diligence questionnaire, spokesman Joe DeAnda said in an email. Besides the due diligence questionnaire, the pension system will add questions about how managers address defined benefit plans of portfolio companies to its list of manager expectations, which includes questions about a variety of ESG factors.

CalPERS did not respond to a public records request for a copy of the due diligence questionnaire as of press time.

While a majority of CalPERS board members appeared to view future reviews of defined benefit plans favorably, board member Dana Hollinger asked staff to seek input from the pension’s fiduciary counsel to ensure the pension wasn’t “diluting our fiduciary duty” by setting expectations on how GPs manage portfolio company retirement plans.

The question of how GPs treat defined benefit plans has been a passion project for Jelincic, who elaborated on his views in an interview with Buyouts earlier this year.

CalPERS should not fund its defined benefit plan by investing with firms that freeze those of employees at private companies, Jelincic said. “Besides being a bit hypocritical, one of the big problems public plans have is political support. And as other people have lost defined benefit plans, they develop an attitude of, ‘Well, I got screwed; you oughta get screwed, too.’”

Strategic objectives

In addition to discussing defined benefit plans, the investment committee also reviewed a staff presentation of a revised policy for its $28.7 billion private equity program. The committee approved the policy with two significant changes.

The committee voted to include language saying the private equity program should “maximize risk-adjusted rates of return.” Staff had struck the phrase from the policy to eliminate “vague and untestable” language, CalPERS Chief Operating Investment Officer Wylie Tollette said.

The elimination of the phrase led some media outlets to speculate that the pension was getting rid of its private equity benchmark (a blended FTSE Russell public equity index plus three percent). The Los Angeles Times wrote: “The suggested policy change had been criticized by financial experts who said it would clear the way for CalPERS to continue to invest in the complex Wall Street sector — the buying and selling of companies — without requiring higher returns to compensate for the added risk.”

CalPERS did not consider any changes to its private equity benchmark at the December 14 meeting.

In the same vein, staff eliminated language which outlined how structuring fees and incentive payments can mitigate misalignment of interest in private equity agreements. The committee voted to include the language around fees and incentive payments intact.

CalPERS had a 9.5 percent allocation to private equity as of October 31, according to meeting documents. The pension was half a percentage point short of its interim target allocation as of the same date.

Action Item: For a more comprehensive look at the ESG factors considered by CalPERS, visit