CalSTRS CIO Chris Ailman Makes Retirement Security His Mission

At the second-largest U.S. public pension plan, Ailman takes advantage of a long investment horizon and the scale to negotiate lower fees.


As CIO of the California State Teachers’ Retirement System, Christopher Ailman never forgets that 896,000 people depend on his pension fund for their future. “Teachers in California are not in Social Security, so we’re their safety net. We are their only certain income,” Ailman tells Institutional Investor. “It’s absolutely critical for women to have some kind of retirement plan.”

In early March the 58-year-old Ailman’s fervent belief in the value of defined benefit pensions brought him from Sacramento to Washington for the annual conference sponsored by the National Institute on Retirement Security. Called Retirement Realities, this year’s installment highlighted an increasingly dire savings situation for participants in U.S. public sector pension funds — particularly women, who, as lower-wage workers, typically put less money away. At CalSTRS, the nation’s second-largest public plan, 72 percent of members are female.

Ailman — whose tall, imposing presence belies a friendly demeanor — has 30 years’ experience in the CIO role at U.S. public pension funds. He joined CalSTRS in 2000 after working at the Washington State Investment Board, the Sacramento County Employees’ Retirement System and the County of Sacramento. Before taking the stage with Wisconsin State Investment Board CIO David Villa and Stephen Cummings, CEO of Aon Hewitt Investment Consulting, to discuss the benefits of a traditional pension for public sector workers, he stopped to chat about CalSTRS’ prospects.

Like many of its peers, the biggest U.S. teachers’ pension fund is severely underfunded, having lost 25 percent of its value after the global financial crisis. Given a $73.7 billion funding gap, its $180 billion in assets represents only 69 percent of what is needed to deliver promised benefits. But in 2014, Governor Edmund (Jerry) Brown Jr. signed Assembly Bill 1469, which boosts member, employer and state contributions to CalSTRS, part of a plan to fully fund it within 32 years.

Ailman, who heads a 120-strong investment team, also has an impressive track record working in his favor: As of June 30, 2015, CalSTRS had posted ten- and five-year returns of 7.02 percent and 12.14 percent, respectively. Last June, 57.4 percent of the fund’s assets were in global equities, with two thirds of that total in U.S. stocks. Fixed income comprised 15.7 percent of the portfolio; real estate and private equity accounted for 12.7 percent and 10.1 percent apiece.

For Ailman, what makes a defined benefit plan successful is pooling liabilities while pooling and professionally managing assets. CalSTRS is constantly looking to allocate to private equity and other illiquid assets for the long term, Ailman says: “If you only invest in a 90-day investment cycle, like mutual funds or most public entities, you’re going to be defeated, especially when you have a 30-year horizon.”

Investment cost is perhaps the most important factor in returns, and large pension funds can negotiate the lowest fees, especially where they manage funds in-house. “Even in the liquid markets like equity and fixed income, we can do internal management at much lower cost than external management — even cheaper than Vanguard, the industry standard,” explains Ailman, a keen swimmer and sailor. “We’ve got some negotiating power on our side because we’re coming in with size.”

There is room for improvement in U.S. public pension governance, a blueprint that dates back to the 1970s. “It’s not a business model that anyone would choose to follow, but we do the best we can,” Ailman says of operating an investment manager inside a government entity, pointing to different structures at Canadian pension plans, sovereign wealth funds and educational endowments.

What would he do with CalSTRS if he had his druthers? “I’d build it from scratch,” Ailman says, along the lines of an insurer. Canadian public pensions have an advantage because they build their own teams to make direct investments in expensive asset classes such as private equity, real estate and infrastructure, he notes: “We’ve seen fee savings there can be enormous.”