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Jan. 17, 2025

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

E130: CalPERS CEO Marcie Frost on the Future of the $500 Billion Pension Fund
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In this episode of How I Invest, I sit down with Marcie Frost, CEO of CalPERS, the largest public pension fund in the United States. From her beginnings in public service to leading a $502.9 billion portfolio, Marcie shares her journey and offers insights into managing one of the most influential pension funds globally. We discuss the challenges of governance, integrating climate change risks into investment decisions, and the importance of building a culture of trust and innovation. Marcie also delves into CalPERS’ strategic focus on sustainable investments, diversity, equity, and inclusion initiatives, and how the organization is setting benchmarks in transparency and fiduciary responsibility.

Highlights: Public Service Journey: Marcie’s transition from Washington state's Department of Retirement Systems to leading the largest public pension fund in the U.S.

CalPERS’ Mission: The role of a $502.9 billion portfolio in securing the financial future of over 2 million California public sector workers and their families.

Strategic Asset Allocation: How CalPERS utilizes its Asset Liability Management process to inform asset allocation decisions and set investment return assumptions.

Integrating Climate Risks: The incorporation of climate change risks into investment decisions across all asset classes and the launch of a $100 billion sustainable investment strategy aimed at reducing carbon emissions intensity by 50% by 2030.

Building a Culture of Trust: Marcie’s approach to fostering an inclusive culture through the development of CalPERS' first Diversity, Equity & Inclusion framework.

Sustainable Investments: CalPERS' commitment to sustainable investing, including its role as a founding member of Climate Action 100+, an initiative with 700 signatories and $68 trillion in assets under management.

Stakeholder Engagement: Expansion of stakeholder outreach to ensure all parties are informed and have a voice in the system's future.

Advocacy for Defined Benefits: Marcie's belief in providing equitable and affordable health care and retirement options for public employees.

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Guest Bio: Marcie Frost is the Chief Executive Officer of CalPERS, overseeing the largest public pension fund in the United States. With over 30 years of experience in public service, Marcie is a dedicated advocate for financial security, transparency, and sustainability. Under her leadership, CalPERS has advanced its goals in asset management, stakeholder engagement, and cultural transformation, ensuring that its over 2 million members can retire with dignity.

Our Podcast now receives more than 200,000 downloads a month. Are you interested in sponsoring an episode? Please email me at dweisburd@gmail.com.

We’d like to thank @ReedSmith for sponsoring this episode!

#VentureCapital #VC #Startups #OpenLP #AssetManagement

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Sponsor: Reed Smith is a dynamic international law firm dedicated to helping clients move their businesses forward. With an inclusive culture and innovative mindset, Reed Smith delivers smarter, more creative legal services that drive better outcomes for their clients. Their deep industry knowledge, long-standing relationships and collaborative structure make them the go-to partner for complex disputes, transactions, and regulatory matters. Learn more at www.reedsmith.com.

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Stay Connected: X / Twitter: David Weisburd: @dweisburd

LinkedIn: David Weisburd: https://www.linkedin.com/in/dweisburd/ Marcie Frost: https://www.linkedin.com/in/marcie-frost-56a30a281/

Links:

CalPERS: https://www.calpers.ca.gov/

Questions or topics you want us to discuss on How I Invest? Email us at dweisburd@gmail.com.

(0:00) Episode preview (0:35) CalPERS' strategic asset allocation, risk limits, and board dynamics (2:39) Composition, election, and decision-making of CalPERS' investment committee (5:25) Understanding board members' risk appetite and stakeholder engagement (9:07) Navigating political aspects and role differentiation at CalPERS (14:02) Changing organizational culture and focusing on investment results (18:29) Sponsor: Reed Smith (21:22) Managing media scrutiny and its impact on investment decisions (22:36) Stability and importance of the CIO role at CalPERS (23:13) Emerging managers, diversity, and strategic planning for 2025-2029 (24:55) Evaluating private markets, liquidity premium, and active vs passive management (27:47) Building relationships as a first call partner to managers (29:43) CEO reflections and fostering a world class culture at CalPERS (31:27) Key takeaways about CalPERS for listeners (34:38) Closing remarks
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

93
00:06:01,714 --> 00:06:06,675
rate volatility or a lower risk appetite for
market volatility and what that does to those

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00:06:06,675 --> 00:06:07,620
contribution rates.

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00:06:07,779 --> 00:06:10,519
And so we have a series of questions that we'll
take the board through.

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00:06:10,819 --> 00:06:16,979
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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00:12:59,254 --> 00:13:03,254
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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00:13:04,934 --> 00:13:09,139
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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00:13:58,334 --> 00:14:01,794
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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00:14:07,460 --> 00:14:13,879
in culture and attitudes around people and
developing that trust that we have to let go of

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00:14:13,940 --> 00:14:16,679
the past and things have happened 18 years ago.

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00:14:17,059 --> 00:14:21,875
As CEO of CalPERS, you have almost as many
employees as some Fortune 500 companies.

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00:14:22,095 --> 00:14:26,274
How do you go about changing the culture for
such a large organization?

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00:14:26,894 --> 00:14:27,134
Yes.

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00:14:27,134 --> 00:14:34,959
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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00:14:47,835 --> 00:14:49,035
survey in a way.

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00:14:49,035 --> 00:14:51,915
But when you walked around and talked with
people, you could tell that there were these

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00:14:51,915 --> 00:14:53,055
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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00:14:59,789 --> 00:15:01,070
what is working really well?

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00:15:01,070 --> 00:15:04,289
Like, what at CalPERS do we need to make sure
that we preserve?

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00:15:04,669 --> 00:15:08,750
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,

231
00:15:13,870 --> 00:15:16,834
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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00:15:22,495 --> 00:15:26,574
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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00:15:33,029 --> 00:15:34,070
that needed to be worked on.

237
00:15:34,070 --> 00:15:36,490
The second piece of that was around team
engagement.

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00:15:36,950 --> 00:15:41,835
It was taking the survey results that again,
these are gifts to organizations.

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00:15:42,054 --> 00:15:45,735
I suggest that you take them in the spirit that
they're meant.

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00:15:45,735 --> 00:15:48,794
Sometimes that spirit doesn't feel very
positive, but you take it.

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00:15:49,014 --> 00:15:52,934
And you understand that people are giving you
these insights that they wouldn't give you

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00:15:52,934 --> 00:15:53,414
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,

245
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.

247
00:16:08,060 --> 00:16:14,205
And prior to COVID, based on, the survey, you
know, database or survey provider we were

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00:16:14,205 --> 00:16:16,625
using, we were top decile employer.

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The third was, we wanted to be much more
efficient and effective.

250
00:16:20,365 --> 00:16:25,330
This is a trust fund, and we need to make sure
that we have reasonable administrative expenses

251
00:16:25,389 --> 00:16:26,590
coming out of that trust fund.

252
00:16:26,590 --> 00:16:30,529
So a very strong focus on efficiency and
effectiveness.

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00:16:31,230 --> 00:16:35,970
Very pleased with where we're at today where
from where we were 8 years ago.

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00:16:36,284 --> 00:16:40,784
Another point I think that we're quite proud of
here is CEM benchmarking.

255
00:16:40,924 --> 00:16:45,404
I think we were the 3rd most transparent,
pension system across the globe.

256
00:16:45,404 --> 00:16:48,044
We moved up from number 8 to number 3 this last
year.

257
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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00:16:52,990 --> 00:16:57,149
confidence and the trust from the membership of
of the system.

259
00:16:57,149 --> 00:17:01,970
And so that trust, you know, that's the
currency by which you get your work done.

260
00:17:02,365 --> 00:17:05,484
And then the last one is really about being
this best practice leader.

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00:17:05,484 --> 00:17:08,464
How do we bring innovation back into CalPERS?

262
00:17:08,605 --> 00:17:10,305
It felt a little stagnant.

263
00:17:10,765 --> 00:17:15,244
It didn't feel like team members' ideas or
employees' ideas were really being heard and

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00:17:15,244 --> 00:17:15,744
implemented.

265
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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00:17:19,869 --> 00:17:25,710
allocation every 4 years, it didn't feel like
innovation was really a centerpiece or a core

267
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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00:17:30,109 --> 00:17:36,355
But, you know, if we were able to recruit this
particular team or we were able to move the

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00:17:36,355 --> 00:17:41,075
portfolio into kind of this niche market that
we've not been able to have access to, what

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00:17:41,075 --> 00:17:42,375
would that do to performance?

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00:17:42,595 --> 00:17:46,849
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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00:17:52,029 --> 00:17:57,549
Some of those are measured on a quarterly
basis, and we've seen improved results across

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00:17:57,549 --> 00:17:58,849
all five of those areas.

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00:17:59,095 --> 00:18:03,495
You mentioned niche strategies and empowering
your investors.

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00:18:03,495 --> 00:18:08,695
One of the criticisms of pension funds is that
they only go after very large managers, and

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00:18:08,695 --> 00:18:13,255
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
Innovation is a driving force in the world and
runs through everything that Reed Smith does.

283
00:18:29,845 --> 00:18:34,484
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284
00:18:34,484 --> 00:18:36,644
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285
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with a focus on growth, efficiency, and

286
00:18:41,125 --> 00:18:46,630
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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00:19:04,434 --> 00:19:09,875
bit more about that, but internally within the
team, there is a bit of risk aversion because

294
00:19:09,875 --> 00:19:10,994
of that that risk.

295
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.

297
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

298
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.

300
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

301
00:19:33,825 --> 00:19:36,805
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.

303
00:19:43,750 --> 00:19:45,269
These are the policies of the board.

304
00:19:45,269 --> 00:19:46,490
They're doing their job.

305
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

306
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.

308
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

309
00:20:03,215 --> 00:20:04,975
can't have hindsight bias later.

310
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

314
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.

316
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

317
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

318
00:20:39,309 --> 00:20:40,910
manner that we thought it should.

319
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

320
00:20:45,470 --> 00:20:48,930
board comes from very, strong labor positions.

321
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.

323
00:20:53,095 --> 00:20:57,654
They don't hold people accountable for a single
mistake, but they are curious about it.

324
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?

326
00:21:00,214 --> 00:21:02,375
Share with us so that we understand it better.

327
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

329
00:21:10,190 --> 00:21:12,190
risk appetite than our team.

330
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

331
00:21:16,269 --> 00:21:20,535
resourced up on our public affairs and the
communication side to help mitigate some of

332
00:21:20,535 --> 00:21:22,394
this, is the headlines.

333
00:21:22,455 --> 00:21:22,775
Right?

334
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

335
00:21:28,695 --> 00:21:33,240
out of the portfolio, well, the timing of that
ended up, you know, costing us money.

336
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.

337
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

338
00:21:43,779 --> 00:21:48,065
make that decision, versus the hindsight bias
that occurred thereafter.

339
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.

340
00:21:52,464 --> 00:21:57,119
You have to be able to have these very strong
communication skills as well.

341
00:21:57,359 --> 00:21:58,420
You can't be reactive.

342
00:21:58,640 --> 00:21:59,779
You need to be responsive.

343
00:22:00,240 --> 00:22:01,460
You need to be accessible.

344
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

345
00:22:05,599 --> 00:22:06,339
like best.

346
00:22:06,960 --> 00:22:10,720
I actually in talking with our members, I enjoy
working with our board.

347
00:22:10,720 --> 00:22:12,160
I enjoy working with our team.

348
00:22:12,160 --> 00:22:14,384
So I think it's just gonna take a bit of time.

349
00:22:14,924 --> 00:22:20,625
And for the investment office, it's having
stability in that chief investment officer

350
00:22:20,765 --> 00:22:21,244
role.

351
00:22:21,244 --> 00:22:24,625
Because what has happened is we'll have a CIO
that comes in.

352
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

354
00:22:34,740 --> 00:22:36,519
what happened, explain the decisions.

355
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

357
00:22:41,505 --> 00:22:43,204
follow button above to subscribe.

358
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.

360
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

365
00:23:12,475 --> 00:23:13,195
these issues.

366
00:23:13,195 --> 00:23:15,455
Steven and I recently had more conversations.

367
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

372
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.