E130: CalPERS CEO Marcie Frost on the Future of the $500 Billion Pension Fund

One of the criticisms of pension funds is that they only go after very large managers. And there's this huge incentive never to take a risk, never to lose money on any part of your portfolio.
How do you create a culture that focuses on results versus headlines or not making any mistakes? That is our challenge, right? So out of any pension fund, CalPERS likely gets the most headlines. That does cause internally, not so much with our board, and I'll talk a little bit more about that, but internally within the team, there is a bit of risk aversion because of that headline risk.
Well, what if I make a mistake and my name is in print? That doesn't feel good to me. And so what we're really trying to do, again, through the new strategic asset allocation or the TPA, is get the board to say, here are the risk appetites.
Here's where we want the team to operate within these limits. And once we have those limits, turn those limits over to the team to be innovative and creative and execute on those limits.
As you go into November 2025 and your strategic planning in September, what do you expect to allocate more to and what do you expect to allocate less to over 2025 to 2021? Marcia, you went from being a typist in your 20s to now running and being the CEO of the largest pension fund in the United States. How did you get here? It was, you know, certainly a bit of a journey.
So I grew up in a really small rural town in Washington State up on the tip of the Olympic Peninsula, a little logging town called Forks, Washington. And I actually started working when I was quite young.
I used to go berry picking with my grandparents so that I made money for school clothes for the following year. I started working in a real estate office in my sophomore year of high school.
And I forfeited all of my electives to be able to leave school at approximately one o'clock in the afternoon. And then I would go and work at this real estate office until 5, 5.30 PM.
And it gave me that work experience so that when I decided that I really wanted something better for my own family, I wanted to relocate from this small, very small town to the capital of the state, which is Olympia, Washington. And so I did start as a typist.
I started in this appointment. It was called a 30-day emergency appointment.
And that 30-day emergency appointment turned into a 30-year career in Washington state, where my last post was running the retirement system, working for Governor Jay Inslee on his cabinet, and also a post on the Washington State Investment Board, which set me up nicely when the headhunter knocked on my door for the job here at CalPERS. Tell me about the composition of the 13 investment committee members.
There's two types of boards. You have your expert boards, and a lot of those can be seen in, for example, the Canadian plans.
What is more common here in the United States is to have what we call a lay board, and these are board members who do not come from the investment industry, but are typically more representative of the membership groups. And that is certainly the way that CalPERS is set up.
We have members who are elected by the actual membership of the plan. We have 2.3 million members, and we have two seats that we call member at large, where 2.3 million members get to vote on who they want representing them on this board.
There's also an election that the retirees, we have about 800,000 retirees, those retirees can vote for the person on the board representing their interests. But I will also say that once you're on the board, you represent all 2.3 million members, regardless of who voted to get you on that seat.
Given that you have 13 investment committee members, how do you go about ensuring that you're not just relying on the least common denominator in order to make everybody happy? How do you make sure that you make the very best decisions as a committee? It's funny that you say that. I think our job outside of our 13-member board is we try to find a balance where it's impossible to make everybody happy.
And as long as we're making everyone equally unhappy, we probably have that balance about right. But with our board, it's really more around education, is making sure that we, as the staff supporting the board, we're giving them the information that they need to be able to make the decisions that we need them to make.
And strategic asset allocation, I would say, is one of the most important decisions that they make every four years. So a lot of education leading up to that decision that will happen in November of 2025.
So it's really understanding your board members. I spend a lot of my time trying to understand, you know, their needs around education and content, values, priorities.
And then as we are preparing the agenda items for any of the board meetings or the committee meetings themselves, it's just making sure that those committee agenda items are addressing the needs of all 13 members so that they can take the action that they need to take. And, you know, for the most part, I have a great board.
We have a board that's very engaged. We have a board that gets time away from their regular day-to-day jobs if they're still actively working so that they can focus on the work of CalPERS.
We spend 12 to 18 months in advance of that significant decision. And there are workshops.
We have a workshop coming up here next week. And the first step really in understanding how you want to allocate the capital across the various markets and asset classes is to fully understand your board's risk appetite.
So what is their risk appetite if the markets are volatile and we see a drop in assets?

What happens if we see contribution rates rising above a certain level?

And so we are taking our board through a risk appetite review in January this next week to fully understand, you know, to what extent do they have a high risk appetite for contribution rate volatility or a lower risk appetite for market volatility and what that does to those contribution rates. And so we have a series of questions that we'll take the board through.
And what that does is it sets up the candidate portfolios, or in our case, we're trying to introduce a new approach, moving a bit away from strategic asset allocation into more of this total portfolio approach and having a reference portfolio to compare our actual performance to what would have happened if we just would have left capital in a reference portfolio. And I like that for a number of reasons.
I like it for accountability. I like it for communication, ease in education, ease of educating, I should say, our board.
But more importantly, these stakeholders, we have a very active stakeholder group who really wants to understand what CalPERS is doing with the capital that's been entrusted to us, their capital. So we start with education.
We bring back approaches within those risk appetite. What does that do to the assumed rate of return or the discount rate on the liabilities, all of that leads up to that

decision that will be happening in November of 2025. But backing up to September of 2025, where we'll have a first reading of the decision and then the final decision being made in November of 2025.
And because of the significance of those decisions, we like to do this in two parts, to bring the stakeholders along, allow a lot of public comment. We get quite a bit of public comment within the board meetings.
Four years ago, we brought in a sovereign debt strategy in emerging markets. And depending on what's happening in those various countries and markets, we get a group of our members who don't think that we should be invested in providing capital to that particular country.
We have to look at that strategy. We needed it four years ago to get to the building blocks, you know, to get to a 6.8% return.
But we want to strip all of that back, take a fresh look at every single one of those strategies that's in the portfolio, including how much do we have going into the public markets? How much do we have going into the private markets? On the private markets, we've increased our allocation, both in private equity as well as private debt. We need a check-in point to see, are we able to actually allocate at the level that the board has asked us to? Why not? And are there any changes that need to happen in terms of expectations around can we actually get to 8% private debt over the next four years? Can we get to 13% private equity over the next four years? And so these are all the discussions that we'll be having with our board, a lot of stakeholder engagement, a lot of stakeholder input, but ultimately, again, making that decision in November of 2025 that will hold for the next four years, along with a two-year interim, kind of a check-in at that two-year point.
Because markets do change. Things change dynamically.
These are not dynamic or tactical asset allocation decisions, but we also have to be prudent trustees or stewards of these resources and need to check in to see how these strategies are performing. You have 2.3 million members.
You have many different views at the table. How do you protect your investors from having to deal with the political aspects of being an asset allocator at CalPERS? I always say that one of the most challenging pieces of this particular role that I'm sitting in, which is quite different in California than it was when I was in Washington, is keeping, we'll just call it politics, whether they're small politics, big politics, keeping the politics out of the portfolio so that the team is able to independently look at the commercial aspects of an investment and not the political aspects of that investment.
I would say we have resourced appropriately to keep that away from our investors as much as possible. I spend a lot of my time, we have a whole stakeholder relationship team who we meet with stakeholders every single month.
And I think it's, you know, the more that we can find the right recipe of being available and accessible, sharing the decisions that we're making, and I think more importantly, the why of that decision, and understanding at the end of that meeting, we may not be in complete agreement with the stakeholders, but at a minimum, they will understand why we're moving forward in the way that we have chosen. It's all, again, about the commerciality of the deal within the values that we have at CalPERS, meeting the 6.8 return target, which is the fiduciary duty that we have.
So I think it's just spending time communicating and finding the best avenues and the best routes to be able to do that. And then resourcing appropriately so that your investment team can purely focus on investing within the policy guidelines and the policy framework that's been established for them.
You have a CIO, Stephen Gilmore, and you're the CEO. Tell me about the roles of the CEO versus the CIO.
Yes. So the CIO, and I'm very pleased to have Stephen Gilmore on the team.
He started with us last July and a critical role. And I would say, you know, as CEO, I spend quite a bit of my time thinking about the portfolio.
I do not get involved in the portfolio decisions themselves, but I do ask a lot of questions about the decisions that the team is making. I ensure that we have proper governance over those decisions.
I ensure that we have proper transparency over those decisions. And I just spend a lot of time, again, just being curious about what they're doing.
How are they allocating? Where are their challenges? How can I help remove some of those challenges? Whereas Stephen's direct role is managing and leading that team, having a vision for the portfolio, help him with the board, understanding how the board wants to see those agenda items coming from the investment committee. But again, I think the difference, primary difference is I don't make the investment decisions, but I do have oversight responsibility

for all of CalPERS. So I need to understand how those decisions are being made and whether they

are in alignment with all of the policies that the board has set. The other place where I've

been more involved is around our data and technology strategy. We have not invested, I would say at the same pace of our peers in technology and finding better ways to use data and turn that data into useful information that can be used in the investment decision-making processes.
And so we have a data and technology project and Steven and I are the executive sponsors for that initiative.

And then the other place where I have a lot of passion about and something I've done throughout my career is the culture and talent development of the 350 person office, making sure that people feel like they have a place where they can stay. Once we recruit people, you come for a job, but we really want people to take that job and stay for a career.
Well, what does it mean, the difference between taking that job and staying for a career, and really understanding that at a very detailed level so that we can make sure that we have the right leadership behaviors supporting that team? Now, in Sacramento, you know, it's not really known as this big financial hub, other than you've got CalPERS and you've got CalSTRS sitting here and you've got almost a trillion dollars in assets under management. And what we find is we often trade talent back and forth and that should be perfectly acceptable to trade talent back and forth for promotional track, for career growth.
But for me, that culture and talent development is one, making sure we have a culture where people feel like they can thrive, that they can learn and develop and be grown and be a part of a succession plan if they so choose. So we have a big body of work right now that is completely focused on culture and talent development.
I've been doing this almost 39 years now. So in my past experience, it's three to five years to really make a significant change

in culture and attitudes around people and developing that trust that we have to let go of the past and things that happened 18 years ago. As CEO of CalPERS, you have almost as many employees as some Fortune 500 companies.
How do you go about changing the culture for such a large organization? Yeah, so when I first came in to CalPERS, it wasn't that the culture was bad at all. Very similar to a couple of the other programs that I had worked in within Washington State.
But you could sense that there was some, that people were scoring the engagement survey in a way. But when you walked around and talked with people, you could tell that there were these unmet expectations.
And so through a series of conversations, a series of focus groups with people about, well, what is working really well? Like, what at CalPERS do we need to make sure that we preserve? And tell me one thing, if you were the CEO, and this is this question all the time, I started asking it when I would do these midday lunches and we'd invite, you know, 25, 30 people from across the organization. And I would always ask that question, if you were the CEO, what's one thing that you would change? And so we collected this information through focus groups, through the engagement survey, through these lunches that I would have.
And we discovered a set, you know, a set of things that needed to be worked on. The second piece of that was around team engagement.
It was taking the survey results that, again, these are gifts to organizations. I suggest that you take them in the spirit that they're meant.
Sometimes that spirit doesn't feel very positive, but you take it and you understand that people are giving you these insights that they wouldn't give you otherwise. So take these insights, figure out what is it, what's the one thing that you need to work on in the next year that has the greatest likelihood of changing that the following year, that people feel differently, people have a different experience.
And so we really focused on team engagement. And prior to COVID, based on the survey, you know, database or survey provider we were using, we were top decile employer.
The third was, we wanted to be much more efficient and effective. This is a trust fund, and we need to make sure that we have reasonable administrative expenses coming out of that trust fund.
So a very strong focus on efficiency and effectiveness. Very pleased with where we're at today from where we were eight years ago.
Another point I think that we're quite proud of here is CEM benchmarking. I think we were the third most transparent pension system across the globe.
We moved up from number eight to number three this last year. And that transparency, why it is so important is I believe that that's what builds the confidence and the trust from the membership of the system.
And so that trust, that's the currency by which you get your work done. And then the last one is really about being this best practice leader.
How do we bring innovation back into CalPERS? It felt a little stagnant. It didn't feel like team members' ideas or employees' ideas were really being heard and implemented.
It didn't feel like that, you know, even though we were going through that strategic asset allocation every four years, it didn't feel like innovation was really a centerpiece or a core aspect of looking at, well, here's what the last four years was. But if we were able to recruit this particular team, or we were able to move the portfolio into kind of this niche market that we've not been able to have access to, what would that do to performance? What would that do to the interesting work that

people would have here at CalPERS? And so those five is how we ended up defining culture. And

we measure those five every year. Some of those are measured on a quarterly basis.

And we've seen improved results across all five of those areas. You mentioned niche strategies and empowering your investors.
One of the criticisms of pension funds is that they only go after very large managers. And there's this huge incentive never to take risk, never to lose money on any part of your portfolio.
How do you create a culture that focuses on results versus headlines or, you know, not making any mistakes? We'll be right back. But first, a word from our sponsor.
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That is our challenge, right? So out of any pension fund, CalPERS likely gets the most headlines. And that does cause internally, not so much with our board, and I'll talk a little bit more about that, but internally within the team, there is a bit of risk aversion because of that risk.
Well, what if I make a mistake and my name is in print, you know, that doesn't feel good to me. And so what we're really trying to do again, through the new strategic asset allocation or the TPA is get the board to say, here are the risk appetites.
Here's where we want the team to operate within the limits. And once we have those limits, turn those limits over to the team to be

innovative and creative and execute on those limits. And so you have to have a culture where your team trusts that this is coming from the board.
These are the policies of the board. They're doing their job.
Investors are not going to make every decision pay off at the level that we thought may be going into it. And we have to have that environment where making, and these are not even making mistakes.
As long as we use the information that was available at the time we made the decision, you can't have hindsight bias later. And so it's just building that culture that when that has happened, because it will happen, how does the organization respond to that? Do they feel supported? Do they feel that they're being centered or pointed out on making an error or making a poor decision? And so that's the culture part that's going to take some time.
And I will tell you in my time here, again, I'm in my ninth year, this board has not reacted to market decline, has not reacted to an investment that did not pay off in the manner that we thought it should. This board has been very supportive of the team.
And I think a lot of that is most of my board comes from very strong labor positions. They work for unions.
They understand how these things operate. They don't hold people accountable for a single mistake, but they are curious about it.
So what happened? What do we learn from it? Share with us so that we understand it better. Is it our policy that's causing us? But our board has been very supportive of the team.
And I would say the board has a higher risk appetite than our team. And I think part of that dynamic, and we'll have to figure this out over time, we've resourced up on our public affairs and the communication side to help mitigate some of this is the headlines, right? So every time, you know, we had a CIO and made a decision about taking, you know, something out of the portfolio, well, the timing of that ended up, you know, costing us money.
And the media, you know, you know, kind of came after him a little bit on that. But I think it was appropriate to ask the questions about why the decision, how did you make that decision versus the hindsight bias that occurred thereafter.
And so if you're the CEO and CIO, what I've said is you've got to have really thick skin. You have to be able to have these very strong communication skills as well.
You can't be reactive. You need to be responsive.
You need to be accessible. You can't tuck yourself away in a corner and just focus on, you know, the things that you like best.
I actually, in talking with our members, I enjoy working with our board. I enjoy working with our team.
So I think it's just going to take a bit of time.

And for the investment office, it's having stability in that chief investment officer role.

Because what has happened is we'll have a CIO that comes in, they'll make decisions along with the team, and then the CIO leaves and something happens with that strategy and the team feels they don't have that CIO there to help explain what happened, explain the decisions. Thank you for listening.
To join our community and to make sure you do not miss any future episodes, please click the follow button above to subscribe. Many of these strategies take four or five, sometimes 10 years to execute.
So that continuity is key. I've seen a lot of pension funds, sovereign wealth funds, larger asset managers structurally solve around these issues.
For example, they might put together a sleeve going after emerging managers. So the losses kind of outweigh the gains in a specific portfolio construction.
There's some novel ways that larger asset allocators have gone about constructing around these issues. Stephen and I recently had more conversations.
We think we can do a better job at funding some of those emerging managers, which happen, a lot of those emerging managers happen to be diverse owners as well. And we think we can do a better job at funding, you know, that next set of investors coming into the market.
And so watch for that, you know, over the next couple of years, but that would be a strategy that we think would really, you know, pay for CalPERS, you know, developing that relationship, developing, you know, that capital, you know, loyalty early in these emerging managers. And then once they become more of what we call a transition manager, and then really this institutional level relationship that we have for decades.
And we think there's significant opportunity there for CalPERS. As you go into November 2025 and your strategic planning in September, what do you expect to allocate more to and what do you expect to allocate less to over 2025 through 2029? It will very much depend on where the board comes in on these risk ranges.
But private markets will remain important to us. I do not see an area where we would be lowering the assumed rate of return or the discounted rate that we do with the liabilities that currently at 6.8.
So 6.8, over the next 20 years, private markets are going to have to be a piece of that TPA and a piece of that reference portfolio, whether that'll be a 70-30 or a 60-40, just really depends on these risk appetite statements. But private markets, private equity, private debt will be an important part of that.
And I want to be really clear, CalPERS is not moving away from those investments, not moving away from the support and what we think that we can get by having those relationships. And those relationships.
And, you know, it just so happens that we're in a great liquidity position. We can tie up our capital for a period of time, but we also expect that we're going to get that liquidity premium and that we're going to get the right terms with the GPs that we're working with.
And, you know, we're doing a lot more in co-investments these days, both on the equity, moving more, you know, into that, you know, more direct space on the private debt side. But to be really clear, we're not moving away from our support of private equity and private debt.
We just up those ranges to 13% and 8%. But again, this will really, and I'm not seeing anything that, again, I think our board is much more supportive of taking the right risks, which would include private assets.
And then what are we going to do with active versus passive? We spent a lot of time about five years ago doing an active risk review on the portfolio, including in our public markets. And a decision was made at that point to remove most of the active mandates in public equity.
We have since gone back to, well, as long as we have conviction with a manager, as long as we can negotiate a fee structure, that we think that with the performance that we believe we can get from this manager, that it will outpace what we could get if we just passively stayed in an index fund. So we have gone back into a bit of active management, both on the global equity book, as well as the fixed income book.
And you will see those are recent decisions. We'll see how those pay off over time.
But it will depend on risk appetite, how that leads to our reference portfolio, and then what are the building blocks to get to that 6.8 or greater? That 6.8% being the target return rate that you've set historically. It is.
And so, you know, this is a system and I think most, at least I think the US based systems do it this way, but the assumed rate of return is the same as the discount rate. So there's no cushion in those two numbers.
And so over time, and I've thought of this, and I think Stephen is curious about this as well, but could you have a different assumed rate of return on the portfolio compared to how you discount those liabilities? And I think there's some opportunities there for us as well. But again, Stephen is new.
He's only been we tease one another that it's hard to be patient there's just so many things to do it's hard to be patient but we will be very patient make sure we're making you know the right decisions at the right time and then bringing our board bringing our stakeholders and our team along with us CalPERS has a strategic goal of being a first call partner to managers. Tell me about that goal and what does that mean?

One of the things I looked at when I first came in to CalPERS was the relationships that we had

with the general partners. Coming out of Washington State, in very strong relationships

with the GPs up there, Washington State was a first call LP at all times, first call LP.

And when I look back at the pacing of, say, the Washington State Investment Board,

I'll see at the time. And private equity had been in business for 15 years, at least at that point.
But what happened during that period of time where we were really out of the markets? And it happened again over the last 15 years as well. So what was going on? And that's why it was really important for me to say that we're not moving away from our conviction in private equity and the private markets.
We're there. We're staying there.
We're not going to make that same mistake twice or three times. But that was a real problem with us.
The next problem that we had was that we were not making decisions quickly enough for the GP. So they just moved on.
Even if we were the first call at that time, we were not giving them an answer back quickly enough and other LPs and they were ready to close the fund. And so they went on to other LPs and closed their fund.
So we fixed a couple of things. One is making sure that the markets know that CalPERS is in, right? We're open, we have liquidity, we have checks to write, and we want to find the right managers to work with under the right terms and conditions to work with.
And then making sure that we have the delegation, the governance, to be able to make those decisions timely when they come to do their fundraising. And I think fixing those two things, as well as hiring the right team on our private equity team, we have Anton Orlich, who's running that team now and has good relationships in the GP community.
You've been at CalPERS for over nine years. What do you wish you knew before you started as CEO of CalPERS? Yeah, so I'm in my ninth year.
I finished my eighth year, October of 2024. And, you know, I've just, I've learned a lot.
You know, growing up in one state is not the same as, you know, running the same job or a similar job in another state. For me, I think it's just understanding the stakeholders a little bit more that I wish

I would have spent a little more time early on understanding them and understanding how

they evaluated their trust in the system.

I wish I would have dug into the issues around the turnover in the CIO a little more.

Thank you. evaluated their trust in the system.
I wish I would have dug into the issues around the turnover in the CIO a little more. I worked with Ted Eliopoulos when I first came in.
We hired Ben Meng. We hired Nicole Musico.
We hired Stephen Gilmore. So four different CIOs in eight years, and that doesn't include the interim that we had during those periods of time between recruitment with Dan Bienvenue, who's one of our deputies.
And so I think it was just maybe understanding that dynamic a bit more and getting in front of it earlier rather than later. Certainly learn some things along the way there.
But I think that's it, just stakeholders and then focusing on the investment office, not the investments, but the investment office a bit more than I did.

World-class culture alongside a world-class investment program.

You got it.

I really started with the enterprise because of that turnover on the investment team.

In hindsight, or what I wish I would have known at the time I started, I likely would have started with our investment team. What would you like our listeners to know about CalPERS? I agree.
It is a great organization. It really is.
And I think the sentiment and what's being written about CalPERS is much more factual, I would say, over the last few years than the first few years on the job. It is a system that understands the mission that we have.
We have these really incredible advantages that we need to take more advantage of. We are strong defined benefit defenders.
We believe in a defined benefit plan, a well-run defined benefit plan. It is easier said than done, but we hope to be able to increase the number of questions and the number of people inquiring about, well, how are you doing this? And part of that is getting that funded level increase, that 75 to anything over 90, feel pretty confident.
Which is easier said than done. There, I'm confident, but I feel a lot more confident if we're like around 90% funded.
Having a benefit that people can actually live on in dignity. I grew up with my grandparents and my grandparents did not have a retirement plan.
They were excellent savers. They ran out of money and seeing what happened with my grandparents, it sits with me today.
And so just understanding that's what CalPERS is about. We have this really interesting $500 billion plus portfolio that gets a lot of attention, but that portfolio is there for one thing, and that's to pay benefits to these public sector workers who have dedicated their careers to doing jobs ultimately that others just would not want to do, whether that's for compensation or that's nature of the job.
So really, what I want people to understand about CalPERS is that it's 2.3 million public sector workers who are relying on a pension. And CalPERS is in this really fun, I think it's really fun, I get up every day really really looking forward to what we get to do here, servicing those members so that they make the best choices around their retirement, not just at the time of retirement, but throughout their career.
What kind of personal savings, what kind of, you know, a 457, we have a governmental 457 plan that they can set aside pre-tax to fund a retirement that might look differently than if they just relied on their defined benefit plan. So we're about people, we're about the members, the portfolio is interesting, but it's set there for one purpose.
And that purpose is to pay those benefits. And the benefits are pretty modest, you know, living in California and the cost of living here, you know, these, you know, these employees on average are

making between 30 and $40,000 per year in their retirement. And that might keep them completely out of poverty, but it certainly isn't, you know, making them wealthy.
It's not giving them maybe all of the options that they would like to have in their retirement, but it really is keeping people in a way that they have some financial security.

And I feel very strongly that every U.S. worker should have access to a defined

benefit plan just to have that safety net that they can have that dignified retirement as well.

Well, Marcy, thank you for sharing your remarkable story. I look forward to sitting

down in Sacramento or New York very soon. That would be great.
Yeah, I'd look forward

to that as well. Thank you.