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Public Pension Prowess

August 19, 2008 4:00 AM | Permalink | Comments (0)

CalPERS is a very big fish. When California's $250 billion employee pension plan flexes its muscle in boardrooms, corporate CEOs sit up and take notice. When it dumps stocks from countries with morally offensive policies, leaders of those nations hear about it.

None of the other public employee pension plans in this country has quite that much clout. But quite a few are starting to gain some. "Public pension plans were for decades sleepy things that nobody paid attention to," says Beth Almeida, executive director of the National Institute of Retirement Security. But in recent years, these funds have grown to some $3 trillion in value. "Obviously, with an investment that large," Almeida says, "they become a focus."

They are a focus because most of them -- although not all -- have done well for their civil-servant customers. Some, like CalPERS, have "developed brand-name equity," says Brad Barber, professor of finance at the University of California-Davis. "They've earned solid rates of return for money they have invested."

This has led to a surprising development: A growing number of states are looking at pension plans as a partial solution to the problem that afflicts private-sector employees.

Fifty percent of the private workforce has no pension plan -- no 401(k) or any other retirement savings program. So, officials in several states think the pension plans could do some good by helping to design work-based retirement savings programs for small businesses or even manage private retirement programs. Under some scenarios, public pension plans would, in effect, become agents for private employers -- to administer and invest money placed in, say, an individual retirement account or a 401(k)-style plan.

So far, the legislatures in only a few states are actively looking into the idea -- notably California, Connecticut and Washington. But the notion is gathering steam.

Immovable Object

It is, of course, in any state's interest to have its private citizens, as well as its public employees, financially prepared for retirement. Those who aren't prepared are likely to be dependent on the state for assistance. "When you look across the economy and at how Americans are preparing for retirement," Almeida says, "you see clouds on the horizon and stormy weather moving in."

The ominous signs include the likelihood that Social Security payouts will be lower for future retirees, the reality that private employers are turning away from defined-benefit pension plans, and the fact that the personal savings rate hovers at or below zero. Meanwhile, the store of wealth that many households relied on -- their homes -- is dwindling in value or being lost.

Although Congress has passed many laws in the past 30 years aimed at improving income security for retirement, those attempts haven't reached people with limited access to retirement plans at work. "We haven't been able to move the needle on that 50 percent coverage rate," Almeida says. That is what the proposals to link public pension expertise with private-employer needs seek to do.

Most workers who lack pension coverage are employed by small businesses that are not in a position to provide a retirement plan -- they have neither the time nor expertise to create or manage them. The employees can, of course, open IRAs -- individual retirement accounts -- at a local bank or financial institution, but few do. Only about 10 percent of those eligible actually open IRAs, and those who open them tend to be at the upper end of the income scale. It takes some effort and knowledge to go to a financial institution, open an account, decide on an investment strategy and make regular payments. "If it's not automatic," says David John, of the Heritage Foundation, "it doesn't get done."

In some states, public pension managers are being asked to help design employer-based IRA programs that would be easy for workers to use, or to advise on contracting out investment responsibilities for the work-based IRA programs.

In California, where legislators are considering a bill that would put CalPERS in charge of small-business-based IRAs, UC-Davis' Barber believes the link to CalPERS is likely to make the plan more marketable. "There are many small businesses," he says, "that would welcome the chance to participate in CalPERS' investment performance."

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