After we wrote last week about CalPERS’s plan to borrow to invest more capital into private equity, some readers asked how employers who issue Pension Obligation Bonds (POB) to make contributions to CalPERS would be affected. The answer is that POB issuers would then be employing four levels of leverage:
- Private equity deals usually employ leverage.
- CalPERS is leveraging to invest in private equity deals.
- Employers issuing POBs are leveraging to make contributions to CalPERS.
- Pension promises themselves are leveraged obligations (contributions are just a fraction of the funds required to meet the promises; interest accrues at the discount rate).