Transcript
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Of the criticisms of pension funds is that they
only go after very large managers and there's
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this huge incentive never to take risk, never
to lose money on any part of your portfolio.
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How do you create a culture that focuses on
results versus headlines or not making any
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mistakes?
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That is our challenge.
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Right?
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So out of any pension fund, you know, CalPERS
likely gets the most headlines.
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That does cause internally, not so much with
our board, and I'll talk a little bit more
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about that, but internally within the team,
there is a bit of risk aversion because of that
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headline risk.
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Well, what if I make a mistake and my name is
in print?
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That doesn't feel good to me.
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And so what we're really trying to do, again,
through the new strategic asset allocation or
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the TPA, is get the board to say, here are the
risk appetites.
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Here's where we want the team to operate within
these limits.
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And once we have those limits, turn those
limits over to the team to be innovative and
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creative and execute on those limits.
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As you go into November 2025 and your strategic
planning in September, what do you expect to
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allocate more to, and what do you expect to
allocate less to over 2025 to 2020?
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Marcy, you went from being a typist in your
twenties to now running and being the CEO of
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the largest pension fund in the United States.
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How did you get here?
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It was, you know, certainly a bit of a a
journey.
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So I grew up in a really small rural town in
Washington state up on the tip of the Olympic
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Peninsula, a little logging town called Forks,
Washington.
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And I actually started working when I was quite
young.
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I used to go berry picking with my grandparents
so that I would made money for school clothes
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for the following year.
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I started working in a real estate office, in
my sophomore year of high school, and I
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forfeited all of my electives to be able to,
you know, leave school at, you know,
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approximately 1 o'clock in the afternoon.
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And then I would go and work at this real
estate office until 5, 5:30 PM.
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And it gave me that work experience so that
when I decided that I really wanted something
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better for my own family, I wanted to relocate
from this small very small, you know, town to
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the capital of the state, which is Olympia,
Washington.
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And so I did start as a typist.
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I started, in this appointment.
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It was called a 30 day emergency appointment,
and that 30 day emergency appointment turned
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into a 30 year career in Washington state,
where my last post was running the retirement
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system, working for governor Jay Inslee on his
cabinet, and also a post on the Washington
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state investment board, which set me up nicely,
when the headhunter, you know, knocked on on my
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door for for the job here at CalPERS.
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Tell me about the composition of the 13
investment committee members.
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There's 2 types of boards.
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You know, you have your expert boards, and a
lot of those can be seen in, for example, the
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Canadian plans.
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What is more common here in the United States
is to have what we call a lay board, and these
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are board members who do not come from the
investment industry, but are typically more
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representative of the membership groups.
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And that is certainly the way that CalPERS is
set up.
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We have members who are elected by the actual
membership of the plan.
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We have 2,300,000 members, and we have 2 seats
that we call member at large where 2,300,000
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members get to vote on who they want
representing them on this board.
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There's also a an election that the retirees we
have about 800,000 retirees.
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Those retirees can vote for, you know, the
person on the board representing their
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interests.
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But I will also say that once you're on the
board, you represent all 2,300,000 members
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regardless of who voted to get you on on that
seat.
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Given that you have 13 investment committee
members, how do you go about ensuring that
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you're not just relying on the least common
denominator in in order to to make everybody
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happy?
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How do you make sure that you make the very
best decisions as a committee?
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I you know, it's funny that you say that.
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I you know, I think our job outside of our 13
member board is we we try to find the balance
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where it's it's impossible to make happy.
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And as long as we're making everyone equally
unhappy, we probably have that balance about
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right.
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But with our board, it's really more around
education is making sure that we, as the staff
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supporting the board, we're giving them the
information that they need to be able to make
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the decisions that we need them to make.
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And strategic asset allocation, I would say, is
one of the most important decisions that they
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make every 4 years.
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So a lot of education leading up to that
decision that will happen in November of 2025.
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So it's really understanding your board
members.
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I spend a lot of my time trying to understand,
you know, their needs around education and
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content, values, priorities.
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And then as we are preparing the agenda items
for any of the board meetings or the committee
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meetings themselves, it's just making sure that
those committee agenda items are addressing the
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needs of all 13 members so that they can take
the action that they need to take.
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And, you know, for for the most part, I I have
a a great board.
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We have a board that's very engaged.
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We have a board that gets time away from their
regular day to day jobs if they're still
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actively working so that they can focus on the
work of CalPERS.
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We spend, 12 to 18 months in advance of that
significant decision.
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And there are workshops.
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We have a workshop coming up here, next week.
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And the first step really in understanding how
you want to allocate the capital across the
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various markets and asset classes is to fully
understand your board's risk appetite.
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So what is their risk appetite if the markets
are volatile and we see a drop in assets?
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What happens if we see contribution rates
rising above a certain level?
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And so we are taking our board through a risk
appetite review, in January this next week to
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fully understand, you know, to what extent do
they have a high risk appetite for contribution
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rate volatility or a lower risk appetite for
market volatility and what that does to those
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contribution rates.
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And so we have a series of questions that we'll
take the board through.
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And what that does is it sets up the candidate
portfolios, or in our case, we're trying to
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introduce a new approach moving a bit away from
strategic asset allocation into more of this
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total portfolio approach and having a reference
portfolio to compare our actual performance to
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what would have happened if we just would have
left, you know, capital in a reference
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portfolio.
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And I like that for a number of reasons.
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I like it for, accountability.
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I like it for ease communication, ease in
education, ease of educating, I should say, our
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board.
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But more importantly, you know, these
stakeholders, we have a very active stakeholder
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group who really wants to understand what
CalPERS is doing with the capital that's been
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entrusted to us, their capital.
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So we start with education.
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We bring back approaches within those risk
appetite.
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What does that do to the assumed rate of return
or the discount rate on the liabilities?
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All of that leads up to that decision that will
be happening in November of 2025.
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But backing up to September of 2025 where we'll
have a first reading of the decision and then
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the final decision being made in November of
2025.
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And because of the significance of those
decisions, we like to do this in 2 parts to
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bring the stakeholders along, allow a lot of
public comment.
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We get quite a bit of public comment, within
the board meetings.
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We 4 years ago, we brought in a sovereign, debt
strategy, in emerging markets.
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And depending on what's happening in those
various countries and markets, we get a group
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of our members who don't think that we should
be invested, in providing capital to that
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particular country.
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We have to look at that strategy.
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We needed it 4 years ago to get to the building
blocks, you know, to get to a 6.8% return.
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But we want to strip all of that back, take a
fresh look at every single one of those
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strategies that's in the portfolio, including
how much do we have going into the public
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markets, how much do we go have going into the
private markets.
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In the private markets, we've increased our
allocation both in private equity as well as
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private debt.
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We need a check-in point to see are we able to
actually allocate at the level that the board
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has asked us to, why not, and are there any
changes that need to happen in terms of
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expectations around can we actually get to 8%
private debt over the next 4 years?
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Can we get to 13% private equity over the next
4 years?
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And so these are all the discussions that we'll
be having with our board, a lot of stakeholder
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engagement, a lot of stakeholder input, but,
ultimately, again, making that decision in
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November of 2025 that will hold for the next 4
years along with a 2 year interim kind of a
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check-in at that 2 year point because markets
do change.
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You know, things change dynamically.
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These are not dynamic or tactical asset
allocation decisions, but we also have to be
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prudent trustees or stewards of these resources
and need to check-in to see how these
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strategies are performing.
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You have 2,300,000 members.
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You have many different views at the table.
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How do you protect your investors from having
to deal with the political aspects of being an
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asset allocator at CalPERS?
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I always say that one of the one of the most
challenging pieces of this particular role that
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I'm sitting in, which is quite different in
California than it was when I was in
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Washington, is keeping we'll just call it
politics, whether they're small politics, big
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politics, keeping the politics out of the
portfolio so that the team is able to
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independently look at, you know, the commercial
aspects of an investment and not the political
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aspects of that investment.
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I would say we have resourced appropriately, to
keep that away from our investors as much as
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possible.
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I spend a lot of my time.
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We have a whole stakeholder relationship team
who we meet with stakeholders every single
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month.
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And I think it's you know, the more that we can
find the right recipe of being available and
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accessible, sharing the decisions that we're
making, and I think more importantly, the why
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of that decision, and understanding at the end
of that meeting, we may not be in complete
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agreement with the stakeholders.
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But at a minimum, they will understand why
we're moving forward in the way that we have
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chosen.
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It's all, again, about the commerciality of the
deal within the values that we have at CalPERS
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meeting the 6.8 return target, which is the
fiduciary duty that we have.
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So I think it's just spending time
communicating and finding the best avenues and
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the best routes to be able to do that, and then
resourcing appropriately so that your
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investment team can purely focus on investing
within the policy guidelines and the policy
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framework that's been established for them.
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You have a CIO, Stephen Gilmore, and you're the
CEO.
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Tell me about the roles of the CEO versus the
CIO.
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Yes.
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So the CIO, and I'm very pleased to have
Stephen Gilmore on the team.
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He started with us, last, July and a critical
goal.
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And I would say, you know, as CEO, I spend
quite a bit of my time thinking about the
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portfolio.
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I do not get involved in the portfolio
decisions themselves, but I do ask a lot of
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questions about the decisions that the team is
making.
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I ensure that we have proper governance over
those decisions.
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I ensure that we have proper transparency over
those decisions.
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And I just spend a lot of time again just being
curious about what they're doing.
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How are they allocating?
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Where are their challenges?
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How can I help remove some of those challenges?
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Whereas Steven's direct role is managing and
leading that team, having a vision for the
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portfolio, help him with the board, you know,
understanding how the board wants to see those
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agenda items coming from the investment
committee.
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But, again, I think the difference primary
difference is I don't make the investment
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decisions, but I do have oversight
responsibility for all of CalPERS.
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So I need to understand how those decisions are
being made and whether they are in alignment
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with all of the policies that the board has
set.
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The other place where I've been more involved
is around our data and technology strategy.
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We have not invested, I would say, at the same
pace of our peers in technology and finding,
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you know, better ways to use data and turn that
data into useful information that can be used
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in the investment decision making processes.
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And so we have a data and technology project,
and Steven and I are the executive sponsors for
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that initiative.
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And then the other place where I have a lot of
passion about and something I've done
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throughout my career is the culture and talent
development of the 350 person office, making
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sure that people feel like they have a place
where they can stay.
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You know, once we recruit people, you come for
a job, but we really want people to take that
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job and stay for a career.
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Well, what does it mean, the difference between
taking that job and staying for a career and
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really understanding that at a very detailed
level so that we can make sure that we have the
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right leadership behaviors supporting that that
team?
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Now in Sacramento, you know, it's not really
known as this big financial hub other than
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you've got CalPERS and you've got CalSTRS
sitting here, and you've got, you know, almost
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a $1,000,000,000,000 in assets under
management.
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And what we find is we often trade we trade
talent back and forth, and that should be
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perfectly acceptable to trade talent back and
forth for promotional track, for career growth.
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But for me, that culture and talent development
is 1, making sure we have a culture where
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people feel like they can thrive, that they can
learn and develop and be grown and have be a
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part of a succession plan if they so choose.
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So we have a big body of work right now, that
is completely focused on culture and talent
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development.
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I've been doing this almost almost 39 years
now.
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In my past experience, it's, you know, it's 3
to 5 years to really make a significant change
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in culture and attitudes around people and
developing that trust that we have to let go of
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the past and things have happened 18 years ago.
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As CEO of CalPERS, you have almost as many
employees as some Fortune 500 companies.
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How do you go about changing the culture for
such a large organization?
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Yes.
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So when when I first came in to CalPERS, it
wasn't that the culture was bad at at all, very
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similar to a couple of the other, programs that
I had worked in within Washington state.
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But you could sense that there was some you
know, that people were scoring the engagement
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survey in a way.
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But when you walked around and talked with
people, you could tell that there were these
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unmet expectations.
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And so through a series of conversations, a
series of focus groups with people about, well,
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what is working really well?
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Like, what at CalPERS do we need to make sure
that we preserve?
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And tell me one thing, if you were the CEO, and
this is this question all the time.
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I started asking it when I would do these
midday lunches, and we'd invite, you know, 25,
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30, people from across the organization.
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And I would always ask that question.
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If you were the CEO, what's one thing that you
would change?
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And so we collected this information through
focus groups, through the engagement survey,
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through these lunches that I would have, And,
we discovered a set, you know, a set of things
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that needed to be worked on.
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The second piece of that was around team
engagement.
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It was taking the survey results that again,
these are gifts to organizations.
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I suggest that you take them in the spirit that
they're meant.
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Sometimes that spirit doesn't feel very
positive, but you take it.
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And you understand that people are giving you
these insights that they wouldn't give you
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otherwise.
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00:15:53,414 --> 00:15:58,060
So take these insights, figure out what is it,
what's the one thing that you need to work on
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00:15:58,060 --> 00:16:02,540
in the next year that has the greatest
likelihood of changing that the following year,
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00:16:02,540 --> 00:16:05,600
that people feel differently, people have a
different experience.
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00:16:06,060 --> 00:16:08,060
And so we really focused on team engagement.
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And prior to COVID, based on, the survey, you
know, database or survey provider we were
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using, we were top decile employer.
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The third was, we wanted to be much more
efficient and effective.
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This is a trust fund, and we need to make sure
that we have reasonable administrative expenses
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coming out of that trust fund.
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00:16:26,590 --> 00:16:30,529
So a very strong focus on efficiency and
effectiveness.
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Very pleased with where we're at today where
from where we were 8 years ago.
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Another point I think that we're quite proud of
here is CEM benchmarking.
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00:16:40,924 --> 00:16:45,404
I think we were the 3rd most transparent,
pension system across the globe.
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We moved up from number 8 to number 3 this last
year.
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00:16:48,044 --> 00:16:52,990
And that transparency, why it is so important
is I believe that that's what builds the
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confidence and the trust from the membership of
of the system.
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And so that trust, you know, that's the
currency by which you get your work done.
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And then the last one is really about being
this best practice leader.
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How do we bring innovation back into CalPERS?
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00:17:08,605 --> 00:17:10,305
It felt a little stagnant.
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It didn't feel like team members' ideas or
employees' ideas were really being heard and
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implemented.
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00:17:16,109 --> 00:17:19,869
It didn't feel like that you know, even though
we're going through the strategic asset
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allocation every 4 years, it didn't feel like
innovation was really a centerpiece or a core
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00:17:25,710 --> 00:17:30,109
aspect of looking at well, here's what the last
4 years was.
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But, you know, if we were able to recruit this
particular team or we were able to move the
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portfolio into kind of this niche market that
we've not been able to have access to, what
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would that do to performance?
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What would that do to the interesting work that
people would have here at CalPERS?
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And so those 5 is how we ended up defining
culture, and we measure those 5 every year.
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Some of those are measured on a quarterly
basis, and we've seen improved results across
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all five of those areas.
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You mentioned niche strategies and empowering
your investors.
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One of the criticisms of pension funds is that
they only go after very large managers, and
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there's this huge incentive never to take risk,
never to lose money on any part of your
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00:18:13,255 --> 00:18:13,755
portfolio.
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00:18:14,359 --> 00:18:20,920
How do you create a culture that focuses on
results versus headlines or, you know, not
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00:18:20,920 --> 00:18:21,980
making any mistakes?
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00:18:22,119 --> 00:18:25,180
We'll be right back, but first, a word from our
sponsor.
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00:18:25,240 --> 00:18:29,845
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runs through everything that Reed Smith does.
283
00:18:29,845 --> 00:18:34,484
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284
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285
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with a focus on growth, efficiency, and
286
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customization because every client's challenges
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287
00:18:46,630 --> 00:18:51,110
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that continually adapts to meet their clients'
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00:18:51,110 --> 00:18:51,610
needs.
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00:18:52,070 --> 00:18:53,210
That is our challenge.
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00:18:53,269 --> 00:18:53,590
Right?
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00:18:53,590 --> 00:18:59,049
So out of any pension fund, you know, CalPERS
likely gets the most headlines.
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00:18:59,190 --> 00:19:04,434
And that does cause internally, not so much
with our board, and we'll I'll talk a little
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bit more about that, but internally within the
team, there is a bit of risk aversion because
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of that that risk.
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00:19:10,994 --> 00:19:13,759
Well, what if I make a mistake and my name is
in print?
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00:19:13,759 --> 00:19:15,679
You know, that doesn't feel good to me.
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00:19:15,679 --> 00:19:20,480
And so what we're really trying to do, again,
through the new strategic asset allocation or
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00:19:20,480 --> 00:19:24,900
the TPA, is get the board to say, here are the
risk appetites.
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00:19:25,265 --> 00:19:29,525
Here's here's where we want the team to operate
within within the limits.
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00:19:29,664 --> 00:19:33,825
And once we have those limits, turn those
limits over to the team to be innovative and
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creative and execute on those limits.
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00:19:37,105 --> 00:19:43,750
And so you have to have a culture where your
team trusts that this is coming from the board.
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These are the policies of the board.
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00:19:45,269 --> 00:19:46,490
They're doing their job.
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00:19:47,269 --> 00:19:53,190
Investors are not going to make every decision,
pay off at the level that we thought maybe
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00:19:53,190 --> 00:19:58,494
going into it, and we have to have that
environment where making it's and these are not
307
00:19:58,494 --> 00:19:59,295
even making mistakes.
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00:19:59,295 --> 00:20:03,215
As long as we use the information that was
available at the time we made the decision, you
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00:20:03,215 --> 00:20:04,975
can't have hindsight bias later.
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00:20:04,975 --> 00:20:08,914
And so it's just building that culture that
when that has happened, because it will happen,
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00:20:08,975 --> 00:20:11,160
how does the organization respond to that?
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00:20:11,160 --> 00:20:12,299
Do they feel supported?
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00:20:12,680 --> 00:20:18,519
Do they feel that they're being centered or
pointed out on making making an error or
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00:20:18,519 --> 00:20:20,940
making, you know, making a poor decision?
315
00:20:21,320 --> 00:20:25,404
And so that's the culture part that's gonna
take some time.
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00:20:25,544 --> 00:20:31,644
And I will tell you, in my time here, again,
I'm in my 9th year, this board has not reacted
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00:20:32,265 --> 00:20:39,309
to market decline, has not reacted to an
investment did that did not pay off in the
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00:20:39,309 --> 00:20:40,910
manner that we thought it should.
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00:20:40,910 --> 00:20:45,470
This board has been very supportive of the
team, and I think a lot of that is most of my
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00:20:45,470 --> 00:20:48,930
board comes from very, strong labor positions.
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00:20:49,654 --> 00:20:50,774
They work for unions.
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00:20:50,774 --> 00:20:53,034
They understand how these things operate.
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00:20:53,095 --> 00:20:57,654
They don't hold people accountable for a single
mistake, but they are curious about it.
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00:20:57,654 --> 00:20:58,934
So what happened?
325
00:20:58,934 --> 00:21:00,214
What do we learn from it?
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00:21:00,214 --> 00:21:02,375
Share with us so that we understand it better.
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00:21:02,375 --> 00:21:04,349
Is it our policy that's causing us?
328
00:21:04,429 --> 00:21:10,190
But our board has been very supportive of the
team, and I would say the board has a higher
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00:21:10,190 --> 00:21:12,190
risk appetite than our team.
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00:21:12,190 --> 00:21:16,269
And I think part of that dynamic, and we'll
have to figure this out over time, we've
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00:21:16,269 --> 00:21:20,535
resourced up on our public affairs and the
communication side to help mitigate some of
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00:21:20,535 --> 00:21:22,394
this, is the headlines.
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00:21:22,455 --> 00:21:22,775
Right?
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00:21:22,775 --> 00:21:28,695
So every time, you know, we had a CIO who made
a decision about taking, you know, something
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00:21:28,695 --> 00:21:33,240
out of the portfolio, well, the timing of that
ended up, you know, costing us money.
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00:21:33,700 --> 00:21:38,039
And the media, you know, you know, kind of came
after him a little bit on that.
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00:21:38,099 --> 00:21:43,779
But I think it was appropriate to ask the
questions about why the decision, how did you
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00:21:43,779 --> 00:21:48,065
make that decision, versus the hindsight bias
that occurred thereafter.
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00:21:48,065 --> 00:21:52,464
And so if you're the CEO and CIO, what I've
said is you've gotta have really thick skin.
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00:21:52,464 --> 00:21:57,119
You have to be able to have these very strong
communication skills as well.
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You can't be reactive.
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00:21:58,640 --> 00:21:59,779
You need to be responsive.
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00:22:00,240 --> 00:22:01,460
You need to be accessible.
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00:22:01,759 --> 00:22:05,599
You can't tuck yourself away in a corner and
just focus on, you know, the things that you
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00:22:05,599 --> 00:22:06,339
like best.
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00:22:06,960 --> 00:22:10,720
I actually in talking with our members, I enjoy
working with our board.
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00:22:10,720 --> 00:22:12,160
I enjoy working with our team.
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00:22:12,160 --> 00:22:14,384
So I think it's just gonna take a bit of time.
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00:22:14,924 --> 00:22:20,625
And for the investment office, it's having
stability in that chief investment officer
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role.
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00:22:21,244 --> 00:22:24,625
Because what has happened is we'll have a CIO
that comes in.
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00:22:24,660 --> 00:22:29,059
They'll make decisions along with the team, and
then the CIO leaves and something happens with
353
00:22:29,059 --> 00:22:34,680
that strategy, and the team feels they don't
have that, you know, CIO there to help explain
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what happened, explain the decisions.
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00:22:36,784 --> 00:22:37,684
Thank you for listening.
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00:22:37,744 --> 00:22:41,505
To join our community and to make sure you do
not miss any future episodes, please click the
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00:22:41,505 --> 00:22:43,204
follow button above to subscribe.
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00:22:43,904 --> 00:22:49,984
Many of these strategies take 4 or 5, sometimes
10 years to to execute, so that continuity is
359
00:22:49,984 --> 00:22:50,640
is key.
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00:22:50,720 --> 00:22:55,140
I've seen a lot of pension funds, sovereign
wealth funds, larger asset managers
361
00:22:55,759 --> 00:22:57,619
structurally solve around these issues.
362
00:22:57,680 --> 00:23:03,299
For example, they might put together a sleeve
going after emerging managers.
363
00:23:03,359 --> 00:23:07,674
So the losses kind of outweigh the gains in a
specific portfolio construction.
364
00:23:07,674 --> 00:23:12,475
There's some novel ways that larger asset
allocators have gone about constructing around
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00:23:12,475 --> 00:23:13,195
these issues.
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00:23:13,195 --> 00:23:15,455
Steven and I recently had more conversations.
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00:23:15,994 --> 00:23:21,539
We think we can do a better job at funding,
some of those emerging managers, which happen.
368
00:23:21,539 --> 00:23:26,839
A lot of those emerging managers happen to be
diverse owners as well, and we think we can do
369
00:23:27,059 --> 00:23:32,279
a better job at funding, you know, that next
set of investors coming into the market.
370
00:23:32,785 --> 00:23:36,785
And so watch for that, you know, over the next
couple of years, but that would be a strategy
371
00:23:36,785 --> 00:23:42,065
that we think would really, you know, pay for
for CalPERS, you know, developing that
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00:23:42,065 --> 00:23:47,309
relationship, developing, you know, that
capital, you know, loyalty early in these
373
00:23:47,309 --> 00:23:48,289
emerging managers.
374
00:23:48,350 --> 00:23:53,150
And then once they become more of what we call
a transition manager and then really this
375
00:23:53,150 --> 00:23:56,684
institutional level relationship that we have
for decades.
376
00:23:56,845 --> 00:24:00,785
And I we think there's significant opportunity
there for CalPERS.
377
00:24:01,085 --> 00:24:07,325
As you go into November 2025 and your strategic
planning in September, what do you expect to
378
00:24:07,325 --> 00:24:12,230
allocate more to, and what do you expect to
allocate less to over 2025 to 2029?
379
00:24:12,609 --> 00:24:17,990
It will very much depend on where the board
comes in on these risk ranges.
380
00:24:18,369 --> 00:24:22,450
But I you know, private markets will remain
important to us.
381
00:24:22,450 --> 00:24:28,295
I don't see I do not an area where we would be
lowering the assumed rate of return or, you
382
00:24:28,295 --> 00:24:33,115
know, the discounted rate that we do with the
the liabilities that currently is at 6.8.
383
00:24:34,055 --> 00:24:40,579
So 6.8, you know, over the next 20 years,
private markets are going to have to be a piece
384
00:24:40,579 --> 00:24:46,819
of that, TPA and a piece of that reference
portfolio, whether that'll be a a 70 30 or a 60
385
00:24:46,819 --> 00:24:49,619
40 just really depends on these risk appetite
statements.
386
00:24:49,619 --> 00:24:54,484
But private markets, private equity, private
debt will be an important part of that, and I
387
00:24:54,484 --> 00:24:55,285
wanna be really clear.
388
00:24:55,285 --> 00:25:02,164
CalPERS is not moving away from those
investments, not moving away from the support
389
00:25:02,164 --> 00:25:05,944
and what we think that we can get, you know, by
having those relationships.
390
00:25:06,085 --> 00:25:09,420
And, you know, it just so happens that we're in
a great liquidity position.
391
00:25:09,420 --> 00:25:13,580
We can tie up our capital for a period of time,
but we also expect that we're gonna get that
392
00:25:13,580 --> 00:25:18,059
liquidity premium and that we're gonna get the
right terms, with the GPs that we're working
393
00:25:18,059 --> 00:25:18,299
with.
394
00:25:18,299 --> 00:25:23,684
And, you know, we're doing a lot more in co
investments, these days, both on the equity,
395
00:25:23,744 --> 00:25:28,144
moving more, you know, into that, you know,
more direct space on the private debt side.
396
00:25:28,144 --> 00:25:32,944
But to be really clear, we're not moving away
from our support of private equity and private
397
00:25:32,944 --> 00:25:33,265
debt.
398
00:25:33,265 --> 00:25:36,484
We just upped those ranges to 13% 8%.
399
00:25:37,000 --> 00:25:42,119
But, again, this will really and I'm not seeing
anything that again, I think our board is much
400
00:25:42,119 --> 00:25:48,220
more supportive of taking the right risks,
which would include private assets.
401
00:25:48,599 --> 00:25:51,244
And then what are we gonna do with active
versus passive?
402
00:25:51,244 --> 00:25:56,444
We, you know, spent a lot of time about 5 years
ago doing an active risk review on the
403
00:25:56,444 --> 00:25:59,404
portfolio, including in our public markets.
404
00:25:59,404 --> 00:26:05,390
And, you know, decision was made at that point
to remove most of the active mandates in public
405
00:26:05,390 --> 00:26:05,890
equity.
406
00:26:06,190 --> 00:26:11,950
We have since gone back to well, as long as we
have conviction with a manager, as long as we
407
00:26:11,950 --> 00:26:18,245
can negotiate a fee structure that we think
that with the performance that we we believe we
408
00:26:18,245 --> 00:26:23,365
can get from this manager, that it will outpace
what we could get if we just passively stayed
409
00:26:23,365 --> 00:26:24,505
in an index fund.
410
00:26:25,765 --> 00:26:31,130
So we have gone back into a bit of active
management both on the global equity, book as
411
00:26:31,130 --> 00:26:34,569
well as the fixed income book, and you will see
those are recent decisions.
412
00:26:34,569 --> 00:26:37,069
We'll see how those pay off over over time.
413
00:26:37,929 --> 00:26:43,335
But it will depend on risk appetite, how that
leads to our reference portfolio, and then what
414
00:26:43,335 --> 00:26:47,194
are the building blocks to get to that 6.8 or
greater.
415
00:26:47,734 --> 00:26:51,914
That 6.8% being the target return rate that
you've set historically.
416
00:26:52,535 --> 00:26:53,015
It is.
417
00:26:53,015 --> 00:26:57,890
And so, you know, this is a system, and I think
most, at least I think bus based systems do it
418
00:26:57,890 --> 00:27:03,670
this way, but the assumed rate of return is the
same as the discount rate.
419
00:27:03,970 --> 00:27:06,130
So there there's no cushion in those two
numbers.
420
00:27:06,130 --> 00:27:11,505
And so over time, and I I've, you know, thought
of this, and I think Steven, you know, is
421
00:27:11,725 --> 00:27:13,265
curious about this as well.
422
00:27:13,404 --> 00:27:18,765
But could you have a different assumed rate of
return on the portfolio compared to how you
423
00:27:18,765 --> 00:27:20,225
discount those liabilities?
424
00:27:20,605 --> 00:27:23,640
And I I think there's some opportunities there
for us as well.
425
00:27:23,640 --> 00:27:25,000
But, again, Steven is new.
426
00:27:25,000 --> 00:27:26,519
He's only been here since July.
427
00:27:26,519 --> 00:27:28,679
We tease one another that it's hard to be
patient.
428
00:27:28,679 --> 00:27:30,599
There's there's so many things to do.
429
00:27:30,599 --> 00:27:34,920
It's hard to be patient, but we will be very
patient, make sure we're making, you know, the
430
00:27:34,920 --> 00:27:38,954
right decisions at the right time, and then
bringing our board, bringing our stakeholders
431
00:27:39,015 --> 00:27:40,474
and our team along with us.
432
00:27:40,615 --> 00:27:44,634
CalPERS has a strategic goal of being a first
call partner to managers.
433
00:27:45,494 --> 00:27:47,494
Tell me about that goal, and what does that
mean?
434
00:27:47,494 --> 00:27:53,509
One of the things I looked at when I first came
in to CalPERS was the relationships that we had
435
00:27:53,650 --> 00:27:55,349
with the general partners.
436
00:27:55,730 --> 00:28:00,289
Coming out of Washington State, we have very
strong relationships with the GPs up there.
437
00:28:00,289 --> 00:28:03,890
Washington State was a first call, LP at all
times.
438
00:28:03,890 --> 00:28:04,869
First call LP.
439
00:28:05,065 --> 00:28:10,825
And when I look back at the pacing of, say, the
Washington State Investment Board, Oregon, and
440
00:28:10,825 --> 00:28:17,705
CalPERS and CalSTRS, I saw CalPERS starting to
really lag behind on the pacing about 15, 20
441
00:28:17,705 --> 00:28:18,424
years ago.
442
00:28:18,424 --> 00:28:23,170
Right at the time, then private equity had been
in, you know, business for 15 years, at least
443
00:28:23,170 --> 00:28:23,990
at that point.
444
00:28:24,210 --> 00:28:27,970
But what happened during, you know, that period
of time where we were really out of the
445
00:28:27,970 --> 00:28:31,825
markets, and it happened again over the last,
you know, 15 years as well.
446
00:28:31,825 --> 00:28:33,025
So what was going on?
447
00:28:33,025 --> 00:28:36,865
And that's why, you know, it was really
important me to say that we're not moving away
448
00:28:36,865 --> 00:28:41,265
from, you know, our our conviction in private
equity and the private markets.
449
00:28:41,265 --> 00:28:41,664
We're there.
450
00:28:41,664 --> 00:28:42,384
We're staying there.
451
00:28:42,384 --> 00:28:45,609
We're not going to make that same mistake twice
or three times.
452
00:28:46,890 --> 00:28:48,970
But that was a real problem of us.
453
00:28:49,609 --> 00:28:56,009
The next problem that we had was that we were
not making decisions quickly enough for the GP.
454
00:28:56,009 --> 00:28:56,970
So they just moved on.
455
00:28:56,970 --> 00:29:01,424
Even if we were the first call at that time, we
were not giving them an answer back quickly
456
00:29:01,424 --> 00:29:05,184
enough and other LPs, and they were ready to
close the fund, and so they went on to other
457
00:29:05,184 --> 00:29:06,565
LPs and closed their fund.
458
00:29:06,785 --> 00:29:07,984
So we fixed a couple of things.
459
00:29:07,984 --> 00:29:12,085
One is making sure that the markets know that
CalPERS is in.
460
00:29:12,230 --> 00:29:12,549
Right?
461
00:29:12,549 --> 00:29:13,289
We're open.
462
00:29:13,349 --> 00:29:14,170
We have liquidity.
463
00:29:14,230 --> 00:29:19,269
We have checks to write, and we want to find
the right managers to work with under the right
464
00:29:19,269 --> 00:29:21,049
terms and conditions to work with.
465
00:29:21,269 --> 00:29:26,525
And then making sure that we have the
delegation, the governance, to be able to make
466
00:29:26,525 --> 00:29:30,525
those decisions timely when they come to do
their fundraising.
467
00:29:30,525 --> 00:29:36,045
And I think fixing those two things as well as
hiring the right team in our private on our
468
00:29:36,045 --> 00:29:36,845
private equity team.
469
00:29:36,845 --> 00:29:43,109
We have Anton Orlich, who's running that team
now and, has good relationships in the GP
470
00:29:43,109 --> 00:29:43,609
community.
471
00:29:43,750 --> 00:29:46,230
You've been at CalPERS for over 9 years.
472
00:29:46,230 --> 00:29:49,130
What do you wish you knew before you started as
CEO of CalPERS?
473
00:29:50,794 --> 00:29:51,034
Yeah.
474
00:29:51,034 --> 00:29:52,075
So I'm in my 9th year.
475
00:29:52,075 --> 00:29:55,934
I finished my 8th year, October of 20, 24.
476
00:29:56,474 --> 00:29:58,554
And, you know, I've just I've learned a lot.
477
00:29:58,554 --> 00:30:03,960
You know, I you know, growing up in one state
is is not the same as, you know, running the
478
00:30:03,960 --> 00:30:07,180
same job or a similar job in in another state.
479
00:30:07,640 --> 00:30:13,160
I you know, for me, I think it's just
understanding the stakeholders, a little bit
480
00:30:13,160 --> 00:30:18,005
more, that I wish I would have spent a little
more time early on understanding them and
481
00:30:18,005 --> 00:30:22,984
understanding, you know, how they evaluated,
their trust, had in the system.
482
00:30:23,444 --> 00:30:29,444
I wish I would've, dug into, you know, the
issues around the turnover in the CIO a little
483
00:30:29,444 --> 00:30:29,944
more.
484
00:30:30,160 --> 00:30:33,299
You know, I I worked with Ted Eliopoulos when I
first came in.
485
00:30:33,599 --> 00:30:34,960
We hired Ben Mang.
486
00:30:34,960 --> 00:30:36,259
We hired Nicole Musico.
487
00:30:36,640 --> 00:30:37,839
We hired Steven Gilmore.
488
00:30:37,839 --> 00:30:43,875
So 4 different CIOs in 8 years, and that
doesn't include the interim that we had during
489
00:30:43,875 --> 00:30:48,275
those, you know, those periods of time between
recruitment, with Dan Bienvenu, who's one of
490
00:30:48,275 --> 00:30:48,934
our deputies.
491
00:30:49,555 --> 00:30:55,075
And so I think it was just maybe understanding
that dynamic a bit more and getting in front of
492
00:30:55,075 --> 00:30:57,529
it earlier, rather than later.
493
00:30:57,529 --> 00:30:59,789
Certainly learn some things along the way
there.
494
00:31:00,730 --> 00:31:01,609
But I think that's it.
495
00:31:01,609 --> 00:31:06,090
Just stakeholders and then focusing, you know,
on the investment office, not the investments,
496
00:31:06,090 --> 00:31:10,190
but the investment office, a bit more than I
than I did.
497
00:31:10,595 --> 00:31:14,055
World class culture alongside a world class
investment program.
498
00:31:14,115 --> 00:31:14,595
You got it.
499
00:31:14,595 --> 00:31:19,875
We start it really started with the enterprise,
because of that turnover on on the investment
500
00:31:19,875 --> 00:31:20,375
team.
501
00:31:20,835 --> 00:31:25,234
In hindsight or what I wish I would have known
at the time I started, I likely would have
502
00:31:25,234 --> 00:31:26,220
started with our investment team.
503
00:31:26,220 --> 00:31:26,720
What
504
00:31:27,900 --> 00:31:29,919
would you like our listeners to know about
CalPERS?
505
00:31:30,779 --> 00:31:31,019
Right.
506
00:31:31,019 --> 00:31:31,339
Yep.
507
00:31:31,339 --> 00:31:32,000
I agree.
508
00:31:32,380 --> 00:31:33,839
It is a great organization.
509
00:31:34,700 --> 00:31:35,500
It really is.
510
00:31:35,500 --> 00:31:40,539
And and I think the sentiment and and what's
being written about CalPERS is much more
511
00:31:40,539 --> 00:31:46,825
factual, I would say over the last few years
than, you know, 1st few years on on the job.
512
00:31:47,125 --> 00:31:50,724
It is a system that understands the mission
that we have.
513
00:31:50,724 --> 00:31:58,240
We have these really incredible advantages that
we need to take more advantage of.
514
00:31:58,480 --> 00:32:01,140
We are strong defined benefit defenders.
515
00:32:01,200 --> 00:32:05,220
We believe in a defined benefit plan, a well
run defined benefit plan.
516
00:32:05,440 --> 00:32:12,625
It is easier said than done, but we hope to be
able to increase the number of questions and
517
00:32:12,625 --> 00:32:15,424
the number of people inquiring about, well, how
are you doing this?
518
00:32:15,424 --> 00:32:20,384
And part of that is getting that funded level
increase, that 75 to anything over 90.
519
00:32:20,384 --> 00:32:21,365
Feel pretty confident.
520
00:32:21,825 --> 00:32:23,664
Which is easier said than done.
521
00:32:23,664 --> 00:32:27,950
There, I'm confident, but I feel a lot more
confident if we're, like, around 98% funded.
522
00:32:29,289 --> 00:32:32,910
Having a benefit that people can actually live
on in in dignity.
523
00:32:32,970 --> 00:32:37,450
These you know, I grew up with my grandparents,
and my grandparents did not have a retirement
524
00:32:37,450 --> 00:32:37,769
plan.
525
00:32:37,769 --> 00:32:39,049
They were excellent savers.
526
00:32:39,049 --> 00:32:40,009
They ran out of money.
527
00:32:40,009 --> 00:32:46,275
And seeing what happened with my grandparents,
it it it it sits with me today.
528
00:32:46,654 --> 00:32:49,615
And so just understanding, that's what CalPERS
is about.
529
00:32:49,615 --> 00:32:55,055
It you know, we have this really interesting,
you know, 500,000,000,000 plus portfolio that
530
00:32:55,055 --> 00:32:56,275
gets a lot of attention.
531
00:32:56,750 --> 00:33:02,029
But that portfolio is there for one thing, and
that's to pay benefits to these public sector
532
00:33:02,029 --> 00:33:07,470
workers who have dedicated their careers to
doing jobs ultimately that others just would
533
00:33:07,470 --> 00:33:11,805
not want to do, whether that's for compensation
or what that's nature of the job.
534
00:33:11,805 --> 00:33:16,605
So, really, what I want people to understand
about CalPERS is that it's 2,300,000 public
535
00:33:16,605 --> 00:33:23,404
sector workers who are relying on a pension,
and CalPERS is in this really fun I think it's
536
00:33:23,404 --> 00:33:23,884
really fun.
537
00:33:23,884 --> 00:33:28,529
I get up every day really looking forward to
what we get to do here, servicing those members
538
00:33:28,529 --> 00:33:34,049
so that they make the best choices around their
retirement, not just at the time of retirement,
539
00:33:34,049 --> 00:33:35,089
but throughout their career.
540
00:33:35,089 --> 00:33:36,529
What kind of personal savings?
541
00:33:36,529 --> 00:33:38,230
What kind of you know, a 457.
542
00:33:38,450 --> 00:33:44,174
We have a governmental 457 plan that they can
set aside pretax to fund a retirement that
543
00:33:44,174 --> 00:33:47,474
might look differently than if they just relied
on their defined benefit plan.
544
00:33:47,615 --> 00:33:49,694
So we're about people.
545
00:33:49,694 --> 00:33:50,914
We're about the members.
546
00:33:51,214 --> 00:33:56,494
The portfolio is interesting, but it's set
there for one purpose, and that purpose is to
547
00:33:56,494 --> 00:33:57,454
pay those benefits.
548
00:33:57,454 --> 00:33:59,279
And the benefits are pretty modest.
549
00:33:59,279 --> 00:34:03,919
You know, living in California and the cost of
living here, you know, these, you know, these
550
00:34:03,919 --> 00:34:10,420
employees on average are making between
$340,000 per year, in their retirement.
551
00:34:11,094 --> 00:34:15,974
And that might keep them completely out of
poverty, but it certainly isn't, you know,
552
00:34:15,974 --> 00:34:17,114
making them wealthy.
553
00:34:17,175 --> 00:34:20,855
It's not giving them maybe all of the options
that they would like to have in their
554
00:34:20,855 --> 00:34:26,170
retirement, but it really is keeping people in
a way that they have some financial security,
555
00:34:26,230 --> 00:34:33,190
and I feel very strongly that every US worker
should have access to a defined benefit plan
556
00:34:33,190 --> 00:34:38,558
just to have that safety net that they can have
that dignified, retirement as well.
557
00:34:38,718 --> 00:34:41,118
Marcy, thank you for sharing your remarkable
story.
558
00:34:41,118 --> 00:34:44,318
I look forward to sitting down in Sacramento or
New York very soon.
559
00:34:44,318 --> 00:34:44,958
That would be great.
560
00:34:44,958 --> 00:34:45,278
Yeah.
561
00:34:45,278 --> 00:34:46,478
I'd look forward to that as well.
562
00:34:46,478 --> 00:34:47,183
Thank you.