Before everything fell about, the managers of the California Public Employees’ Retirement System could be insufferable.
CalPERS knew how everything in the world ought to work, and managers there used their zillions of dollars in assets to try to get their point across.
They knew how pension funds should invest their assets to get everyone to be nice. They knew why all of those commercial acute care health insurers’ premiums were too high. They knew why it was absolutely logical that CalPERS’ self-funded long-term care (LTC) benefits program premiums were 20 percent to 30 percent lower than the premiums for private LTCI policies.
“Most of these savings result from the direct marketing and self-funded, not-for-profit aspects of the program,” a guest columnist wrote in an article for National Underwriter back in 1996.
Then, um, stock prices fell, interest rates fell, and it turned out that the CalPERS’ managers had made silly assumptions about how much policyholders would use their policies. The CalPERS’ managers learned that their bodies were capable of stinking, too.
It would be reasonable for people in the private LTCI community to be a little cranky about the news that CalPERS’ investment portfolio produced a 16 percent return in 2013.
But, if a pension fund that big did so well, maybe that’s a sign that private insurers could also start to do better.
CalPERS can invest heavily in stocks and private equity funds, which are not prominent parts of LTCI issuers’ investment portfolios, but, if stocks and private equity are doing that well, maybe that will force issuers of high-grade corporate bonds to pay a little more to compete.
Analysts at Standard & Poor’s recently noted that LTCI can benefit from the increased returns that come with higher bond rates, without typically suffering the kind of “disintermediation” (flight to higher-performing assets) that might hit interest-sensitive investment products.
Maybe, a year or two from now, executives at the LTCI issuers that stuck it out will be able to give interviews about how they stuck it out as the scaredy cats ran to specialize in borrowing money from the federal government at one rate, then keeping themselves going by lending the money back to the government at a slightly higher rate.