Exclusive: CalPERS asks for a break

America's largest public pension tries to cut fees.

FORTUNE -- Most California public employees are facing a 5% pay cut. Now the state's largest pension system, CalPERS, wants its contractors to accept a similar reduction.

Fortune has learned that CalPERS last week sent a letter to 112 service providers, asking them to voluntarily help "reduce the operating expenses of the system." Recipients included many firms that work with CalPERS' private markets group, including Capital Dynamics, Cogent Partners, Hamilton Lane, LP Capital Advisors and Wilshire Associates.

Primary investment fund managers did not receive the letter, with a system spokesman citing investment staff's well-publicized efforts to hold down fees as part of the new commitment process. Chances are that there also were most-favored nation considerations, since a cut for CalPERS could result in a cut for all other LPs (something few PE firms would voluntarily accept).

The letters do not specify a target reduction, although the 5% appears to be guidance. CalPERS last issued a similar request back in 2009. At the time, CalPERS sent letters to 600 contractors and received 242 replies. Of those, the system says:

• 99 agreed to some type of rate reduction
• 50 had previously agreed to lower rates or were willing to do so in their next contract
• 43 agreed to furloughs and/or extending their purchase order in lieu of a rate reduction
• 38 either could not reduce or their contract/PO had been fully expended and/or expired.

In all, CalPERS estimates that the 2009 requests saved the system just over half a million dollars.

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