CalSTRS Looking North to Change Structure?

Follow-up to my earlier comment on OMERS' 2011 results. James Nash of Bloomberg reports, California Pension Looks to Ontario Experience to Reduce Outside Managers:

The California State Teachers’ Retirement System, exploring changes in hiring and pay to reduce its dependence on external managers, is looking to one of Canada’s biggest public retirement funds for advice.

The second-largest U.S. public pension, which manages a third of its $152.7 billion portfolio in-house, is consulting the Ontario Municipal Employees Retirement System (OMERS), which self- manages about 85 percent of its C$55.1 billion ($55.1 billion) portfolio.

The California fund posted a 2.3 percent gain on investments in 2011, reducing its ability to meet long-term obligations to 856,000 members and their families, while the Ontario fund reported a return on assets of about 3.2 percent. Following the Ontario plan’s model, in which investment officers are treated as employees of a corporation, might give Calstrs more flexibility to respond to market conditions, spokesman Ricardo Duran said.

“They act more like a private investment firm,” he said in a telephone interview. “They have the ability to be more flexible with their hiring.”

The Toronto-based fund, known as Omers, oversees benefits for about 420,000 retired and active government workers in Canada’s most-populous province. Rick Miller, chairman of the Omers Administration Corp.’s 14-member board, is scheduled to meet with the California fund’s board March 1 in Glendale.

As of June 30, Calstrs managed 33 percent of its portfolio internally, up from 30 percent a year earlier, according to its annual reports to the state Legislature.

In-House Management

Omers ultimately plans to manage 90 percent of its portfolio in-house, said a spokesman, John Pierce. In 2010, the fund realized $25 in earnings for every dollar spent on its investment staff, compared with $10 for every dollar on outside managers, Pierce said by telephone.

“Omers is independent from government,” Pierce said. “Our investment team has 100 percent skin in the game. They’re not working for anyone else.”

U.S. public pensions operate under a variety of models, said Keith Brainard, research director at the National Association of State Retirement Administrators. Several systems are looking to Canadian-style or non-government structures, he said by telephone.

“One underlying issue is that it’s not unusual for a pension system to have trouble hiring and retaining good people,” Brainard said.

US public pension funds are notorious for underpaying their managers. The governance model at most these funds is weak and it's not just due to poor compensation. They have too much political interference, lack of proper oversight, over-reliance on pension consultants who typically recommend outside managers with little or no regard for alignment of interests.

Is the OMERS model the best model to follow in Canada? No, there are other pension plans like Ontario Teachers that do not have subsidiaries for every investment activity and even though they manage assets internally, they still rely on external managers to manage a good chunk of assets.

Then there is Healthcare of Ontario Pension Plan (HOOPP) which is a private defined-benefit plan and arguably one of the best in North America. They are fully funded and match their assets and liabilities very closely. Jim Keohane who recently became President & CEO told me HOOPP learned a lot from ATP, Denmark's pension plan which posted tremendous results last year.

I think it's good that CalSTRS is looking at the Canadian pension model. I would advise them to talk with as many people as possible, including Neil Petroff and Jim Leech of Ontario Teachers' and Leo de Bever of Alberta Investment Management Corporation (AIMCO). They should also talk with senior managers at HOOPP, ATP and APG, a leading Dutch pension fund managing billions and doing innovative things like seeding hedge funds and managing their beta portfolio more intelligently.

Below, Bloomberg's Kelly Bit reports that newly started hedge funds received $12.4 billion in deposits from 2009 through 2011 from investors that believe many managers perform best during their early years, according to a Citigroup Inc. report. She speaks on Bloomberg Television's "Money Moves."