The $556.2B California Public Employees’ Retirement System’s adoption of a Total Portfolio Approach (TPA) will improve decision-making clarity, reduce benchmark complexity, and increase transparency and accountability, said Stephen Gilmore, the pension’s fund’s chief investment officer, during a recent board meeting.
The new approach would see the pension fund move away from a strategic asset allocation portfolio that includes 11 asset class benchmarks to a simple, passive 75/25 equity-to-bond reference portfolio that would serve as the fund’s new benchmark, while maintaining the current 6.8% discount rate. Gilmore noted management would only be able to deviate from that reference, within a strict 400 basis point active risk limit.
CalPERS’ shift to a TPA is part of its broader asset-liability management initiative, which the board is set to vote on in November. If the measure goes through, full implementation is slated for July 2026.
“One of the big advantages of this approach is that it’s very clear on the risk tolerance and what risk we’re targeting,” said the CIO.
Currently, the portfolio has a 72/28 equity-to-fixed income mix, so the new approach would slightly increase risk. However, the investment team pointed out that the system’s strong funding status (79%) and long investment horizon supports a modest increase in risk. “We think on balance, that’s a number that gives us the right return in a risk-adjusted sense,” said Gilmore.
He expects the fund will capture slightly higher expected returns, despite the modest risk trade-off. Indeed, he surmised that, based on the fund’s capital market assumptions, the new 75/25 mix could outperform the current portfolio over the long term. Still, Gilmore reiterated that any shift must carefully weigh higher return expectations against greater portfolio volatility, with modeling from the actuarial office helping to assess any implications for the system’s funded status.
The shift to TPA is also expected to enhance environmental, social, and corporate governance (ESG) integration by removing structural silos. CalPERS has hired two ESG integration specialists — one for public markets, one for private — to work directly with each asset class. In private markets, every new investment will be screened against CalPERS’ internal ESG requirements and any gaps flagged and addressed before final decisions are made.
On the public side, ESG integration is already well established in global public equities, while work is underway to enhance fixed income ESG frameworks, particularly in emerging markets. CalPERS is also developing a labor principle scoring tool to flag companies with incidents or risks (e.g., workplace issues reported in the media), so the investment team can evaluate whether those risks are properly priced into securities. All new and existing active managers are required to attest to CalPERS’ labor principles, with that compliance now embedded into the manager selection and onboarding process across asset classes.
CalPERS is also developing a new dashboard that will enable it to track and report portfolio-level outcomes under the TPA. The dashboard will track asset allocation, use of risk, and any deviations from the new 75/25 reference portfolio.
Gilmore emphasized that TPA is not a radical overhaul but an evolution. “I really don’t see this as like a drastic revolutionary change. I see this as more of an evolution or refinement — it’s additive. It adds more and better information and allows management to make more transparent processes and decisions,” he said, noting the shift will enable the fund to leverage comparative natural advantages, including size, scale, pacing, and partnerships.
If approved, the new framework would guide not only strategic portfolio construction but also individual investment decisions. For example, Gilmore said, a large infrastructure investment would first need to show it exceeds the expected return of the reference portfolio since funding it would require selling a mix of equities and bonds.
Operationally, the new model will be supported by ongoing investment in technology and data systems. Gilmore noted that while CalPERS already has the infrastructure needed to transition to a TPA, modernization efforts are underway to streamline reporting and enable a more unified total portfolio view.
The investment team plans to develop and update a rolling three-year investment plan. This long-term view is particularly critical for private markets, where relationships and pacing strategies require stable planning horizons, he said. The system will continue to report on portfolio exposures and risk usage to the board quarterly.
Ultimately, this is about building a system that thinks holistically, allocates capital based on value to the total portfolio, and provides a clear benchmark for evaluating whether our decisions are actually adding value over time, said Gilmore.
