CalPERS to adopt new RE accounting policy

The California pension giant will formalise the central role of fair value accounting in its real estate portfolio and will require external fund managers to comply with these standards.

The California Public Employees’ Retirement System has submitted for investment board approval a new accounting policy that imposes fair value on all aspects of its real estate portfolio.

The accounting policy is detailed in a recent CalPERS disclosure.
CalPERS has a real estate portfolio worth roughly $20 billion, according to the public pension’s web site.

According to the disclosure, the policy “is effective immediately upon adoption and supersedes all previous Equity Real Estate – Accounting Policies”.

Among the objectives of the new policy is to “accurately calculate and report fair market values of CalPERS owned assets and ownership interests within all Real Estate classifications. .  .” A further goal is to impose the uniform usage of National Council of Real Estate Investment Fiduciaries (NCREIF) standards across the portfolio.

CalPERS also will incorporate, where appropriate, standards promulgated by the International Accounting Standards Board (IASB), the CFO Institute Global Investment Performance Standards (GIPS).

The pension’s Performance Monitoring Unit will review the practices of CalPERS “investment partners” (fund managers) to ensure that quarterly and annual reports are in line with the standards. The unit will be expected to provide “explanations of violations and the corrective actions taken”. Specifically, CalPERS investment partners will be required to “prepare and submit GAAP-compliant financial statements in the format required by CalPERS on a quarterly basis”.

A May report to the CalPERS investment committee from a real estate consultant, Pension Consulting Alliance, warned of deteriorating performance over the next 12 to 24 months, and concluded: “We expect upcoming outside appraisals to incorporate larger write downs, particularly in the portion of the portfolio invested in more highly leveraged, opportunistic investment properties.”

The investment committee will vote on approving the accounting policy August 17.

Fair value accounting’s central principle is that an asset must be valued at its current price if sold today into an orderly market. Especially on the private equity side of the alternatives market, general partners have resisted fair value as being an inappropriate way to value assets held for the long term. Many also argue that the current market distortions do not capture the intrinsic values of assets.