Workers’ Capital News - April 13

In this issue:

  • Examining the Economic Impact of Pension Spending / Cutting Total Cost at CalPERS / ESG and Executive Compensation / South African Fund (GEPF) Guided by ESG Considerations / Index Providers Pushing into Active Management Domain

Examining the Economic Impact of Pension Spending

A recent article in Top1000 Funds highlights the positive impact of retirement benefits and defined benefit (DB) schemes in contributing to economic output and supporting jobs. Amid the current debate about the cost of pension expenditures in the US, a new report by the National Institute on Retirements Security (NIRS) reveals that pension payments have a profound multiplication effect in local economies. The NIRS’s research examines the spending of benefits by retirees in every US state and shows that this spending has a “ripple effect” in helping stimulate the economy. Though some argue that DB funds take away from public resources, the study highlights the decline in government spending on public pensions and the fact that most of the contributions to DB pension schemes are derived from investment earnings. Research findings from the National Association of State Retirement Administrators also exhibits that funding for public employees’ retirement schemes by state and local governments has fallen since the 1980s.

Cutting Total Cost at CalPERS

Top 1000 Funds reports that CalPERS is seeking to cut its total cost of managing investments, by focusing on reducing external management expenditures, and looking to reinvest the savings in internal management. Through this new strategy, internal administration costs would likely increase, but total costs would lower, with CalPERS aiming to cut up to 10 basis points from the total costs of managing its investment portfolio. As part of the “total cost shakedown” at CalPERS, the investment office has pointed to three main areas to examine with reference to cost control: private versus public assets, external versus internal management, and the complexity and breadth of investment activities. External asset management fees account for the majority of CalPERS’s total fees, and as such, over the next three years, the organization is looking to reduce external management and consulting costs by $100 million-$200 million. CalPERS’s investment office is also seeking to reduce the complexity of its investment activities overall, but while selectively implementing complex investment strategies where significant value can be obtained.

ESG and Executive Compensation

In an article in Top 1000 Funds, ESG is described as “almost an afterthought” in companies’ executive remuneration practices. Few companies have a direct clause that integrates sustainability metrics into executive compensation packages. According to Kimberly Gladwell, Governance Metrics International’s (GMI) director of research and risk, and Nicolas Mottis, professor at ESSEC Business School, institutional investors can play a key role in reversing this behavior and pushing companies’ towards a strategy of linking ESG to executive remuneration. Pressure can be applied by publicizing examples of best practices and also by institutional investors urging companies at the CEO-level to focus more on ESG issues. The article also highlights that often the sustainability metric reported by a company makes up such a small portion of executive remuneration that it becomes negligible. The UNPRI has recently embarked on a project to link ESG metrics to executive compensation. As part of its research, the study will look at ten international companies with experience integrating sustainability into executive compensation schemes. Research in this area in general faces the obstacle of a lack of data, emphasizing the importance of fieldwork in studying the examples and challenges of companies seeking to improve ESG performance.

South African Fund (GEPF) Guided by ESG Considerations

Investment decisions should be guided by ESG considerations, alongside expectations on returns, maintains John Oliphant, head of investments at South Africa’s Government Employees Pension Fund (GEPF), in a recent Top 1000 Funds article. As one of the first signatories to the UNPRI, the $130-billion defined benefit fund has a long-term investment strategy of matching its liabilities and contributing to local economic development. GEPF employs a four pillar approach to developmental investment that focuses on investments in economic infrastructure, social infrastructure, sustainability projects and small venture capital enterprises. Through a focus on investments in physical infrastructure and in social capital in South Africa, GEPF looks to play a role in creating growing job opportunities and increasing the membership of the fund. According to John Oliphant, Africa’s economy will continue to grow and African pension funds and their members are well positioned to benefit by employing the right investment strategies.

 Disclaimer: The CWC News Digest is a compilation of news items covered in industry publications. The content does not necessarily reflect the views of the Committee on Workers Capital or its members. Comments and reflections on news items may be sent to .


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