Here’s an interesting interview with Eric Baggesen, Senior Investment Officer for Global Equity at CalPERS (Baggesen is responsible for implementation and management of investment strategy and policy for the pension fund’s $132 billion portfolio in publicly traded equity investments worldwide). While not representing the private equity portion of the CalPERS team, it’s still interesting to hear how he forsees the future direction of his portion of the kingdom. Of interest are his views on the whole mark-to-market debate and proposed changes to accountancy standards.
‘Interviewer: What is your stance in the debate around accounting standards and the marking to market of assets?
Eric Baggesen: I think as an organisation CalPERS has got some concerns in relation to that potential marking to market – in other words, the returns that are available right now in the market do not equal the 7.75% return estimation that we have for the plan.
I think what the organisation is concerned about is that those numbers can then be used to potentially call into question the investment premise behind CalPERS and also the entire organisation. It’s the perpetual nature of the pension fund that allows you to expose it to investment risk, which has been well rewarded over the years in returns higher than you could obtain in, say, just government bonds. At any point in time, anyone who takes any investment risk in their programme can see variations in value and the investment thesis for taking risk is that you have to be able to withstand this.
I don’t understand why an organisation like CalPERS or any other governmental sponsored plan would not be viewed in a perpetuity context – I think that aspect comes from corporations, where their existence is much more tenuous, so there’s more concern about, ‘ok what’s the terminal value of the pension fund right now if the corporation were to go out of business?’ That liability [would then] fall off to the Pension Benefit Guarantee Corporation.’
‘Interviewer: There are some that are pushing for public plans to come under the same accounting standards as corporate plans. You clearly think this would be wrong, then?
Eric Baggesen: I think right now in the US the things that are closest to perpetuity are governmental structures – they’re not subject to the same forces as corporations. To apply a uniform standard – and a standard that would tend to make the investment programme extremely conservative – literally looks like a movement back to where pension investment was 50 or 60 years ago and ignores all of the experience of that intervening time period where pensions have been well-served by being able to take some incremental investment risk.’