Management of California Pension Funds

California SERS, 25th Silver Anniversary Report, 1957. See Report of the Actuary for the year ending June 30, 1958, 28th Annual Report of SERS (1959), Part II.

U. S. Bureau of the Census, “Finances of Employee-Retirement Systems of State and Local Governments in 1960,” (G-GF60-N0. 3) April 28, 1961, Tables 1 and 2. These funds total $18.5 billion.

California Government Code, Part 3, State Retirement System, Chapter 2 Administration, Article 4, The Retirement Fund, Section 20205, et seq.

California Financial and Banking Code, Section 1372. For a statement of the “prudent man” rule, see: Harvard College v. Amory, 9 Pickering (Mass.) 446 (1830).

California Civil Code, Section 2261, Chapter 811, Laws of 1943: “In investing … the trustee shall exercise the judgment and care, under the circumstances then prevailing, which men of prudence, discretion and intelligence exercise in the management of their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income, as well as the probable safety of their capital… Within the limitations of the foregoing standard … a trustee is authorized to acquire … common stocks….”

Opinion of the Attorney-General of California, No. 59/329, April 14, 1960.

Government and industrial pension accounting and reporting are not always uniform and slightly differing formulae may be used in computing yields. Variations due to different methods of comptuing yield are generally minor—amounting to less than 1/10 of 1 percent. Except when yields are computed on market values or include capital gains, variations are not substantial and do not preclude reliable performance comparisons. Where yields are not computed by the fund itself they are computed according to the method customarily used by the life insurance industry, i.e.: The net interest rate is the ratio of the net investment income (from dividends, interest and rents but not including capital gains or losses) to the mean invested assets (including cash) decreased by one-half the net investment income. Net investment income is before deduction for Federal Income taxes. (See: Institute of Life Insurance, Fact Book, 1961, p. 59.) Also, yield performance data needs to be interpreted with care for this quantitative measure does not necessarily reflect quality of portfolio holdings or varying investment objectives.

Howell Paul L. , “Pension Funds, A New Midas,” The Bond Buyer, November 27, 1961, Table V. See also: Securities and Exchange Commission, Corporate Pension Funds, Statistical Release No. 1750, May 3, 1961, Tables 1 and 3.

Harvard College v. Amory, 9 Pickering (Mass.) 446, (1830).

Howell Paul L. , “Investment Management of Union Pension Funds,” Commercial and Financial Chronicle, August 1, 1957.

For fuller discussion of investment requirements of pension funds, see: Howell Paul L. , “Common Stocks and Pension Fund Investing,” Harvard Business Review, November 1958, Vol. 36, p. 92.

The tax exemption qualification provisions of the Internal Revenue Code merely aim at preventing discriminatory self-dealing security purchases. See, particularly, Section 503 (c) Prohibited Transactions. The recently strengthened Welfare and Pension Plans Disclosure Act of 1958 requires only a nominal summary of portfolio disclosure. See testimony of Paul L. Howell, Hearings on S. 1122, June 28, 1957, p. 427–437, before U. S. Senate Committee on Labor, 85th Cong. 1st Session; and, Hearings on H. R. 7234, June 28, 1961, p. 414 et seq., House Education Committee, 87th Cong. 1st Session.

“Policy and Investment Recommendations for the Funds of the California State Employees' Retirement System,” Moody's Investors Service in association with Paul L. Howell, September 15, 1960, 152 pp.

Howell Paul L. , “Common Stocks and Pension Fund Investing.” See note 11.

For further discussion, see: Howell Paul L. , “Investment of Public Pension Funds,” Proceedings of Committee on Public Employee Retirement Administration, 55th (1961) Annual Conference of Municipal Finance Officers Association, pp. 82–96.

Board of Administration, California SERS, Annual Report to the Governor and the Legislature, December 1961.