CalSTRS, Canada warn against sovereign fund legislation

CalSTRS’ board has vehemently opposed a pending California bill that would limit pensions’ investments in private equity firms with links to sovereign funds, while the president of Canada’s second-largest pension today warned a US Congressional task force against introducing similar legislation.

An official from Canada’s second-largest pension plan today warned US legislators against introducing rash, protectionist laws aimed at curbing sovereign wealth fund involvement in private equity.

Canada Pension Plan Investment Board’s chief executive officer David Denison called for politicians to look “beyond the labels” of sovereign wealth and realise its importance to US economy.

He said pension funds such as the CPPIB, which managed C$119.4 billion ($121 billion) at the end of 2007 for 17 million Canadians, were increasingly reliant on the free flow of cross-border capital owing to the country’s economic size and demographics.

Denison also said many pension funds could be caught out by legislation targeted at sovereign wealth because, as in CPPIB’s case, they were set up by governments.

This bill would be a blow to the retirement security of teachers while doing nothing to ensure a better world.

Dana Dillon, CalSTRS chair

“Although we have the word `Canada’ in our name and were created by an act of Parliament … [we are] in short a familiar private sector model, but with public accountability,” he told the House Financial Services Committee’s special task force on sovereign funds.

Denison’s testimony comes as a California legislators are set to debate a proposed bill, AB 1967, that would prevent the US’ two largest pension schemes, the California Public Employees’ Retirement System (CalPERS) and California State Teachers’ Retirement System (CalSTRS), from investing in private equity funds and firms partially or wholly owned by some sovereign wealth funds. At issue is sovereign wealth funds with links to countries that have not signed at least five of six international treaties on human rights.

At its investment committee meeting today, CalSTRS’ board voted to oppose the legislation due to its negative fiscal impact and restriction of the board’s investment authority.

“This bill would be a blow to the retirement security of teachers while doing nothing to ensure a better world,” Dana Dillon, CalSTRS’ board chair and a California schoolteacher/librarian, said in a statement. “We have a strong record of addressing these issues in our investment decisions. Our geopolitical risk policy is the first of its kind among US pensions. AB 1967 may be well intentioned, but is a dead wrong solution.”

Introduced in February, the legislation, if passed, would prevent CalSTRS and CalPERS from investing in the likes of The Carlyle Group and Apollo Management, both of which have sold stakes in their management companies to Abu Dhabi government funds. CalSTRS estimates that its inability to invest in these managers would result in a five-year revenue loss of at least $1.5 billion and as much as $5 billion.

And, noted a CalSTRS staff report, at least three other top tier private equity firms are also close to selling stakes to sovereign funds, with staff expecting as many as seven firms to do so in the future.

“We can’t eliminate the portfolio’s best performers by banishing the top-tier private equity firms,” Jack Ehnes, CalSTRS chief executive, said in a statement. “This bill ignores the realities of the global financial marketplace where sovereign wealth funds are passive investors in a growing number of the most attractive investment opportunities in the world.”

CalPERS is slated to discuss the legislation on 17 March; a spokeswoman told PEO staff is still analysing the bill's potential impacts.

Industry group the Private Equity Council has said they are opposing the bill.