Educator Pensions Reward Decades of Classroom Service

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1 Educator Pensions Reward Decades of Classroom Service

2 Retirement Anxiety The average nearing-retirement U.S. household has virtually no savings (only $14,500).

3 Nearly half of Americans would have trouble finding $400 to pay for an emergency.

4 Women in Retirement Women aged are three times as likely to live in poverty, compared to men. Women 80% more likely to face financial hardship in retirement. Women in education, health care and public service have higher incomes and lower rates of poverty, due to DB pensions.

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6 72% of Our Members Trust CalSTRS Source: 2015 Annual Member Satisfaction Survey

7 Your Voice Matters! Trust in Financial Industry Declining

8 Meet the Teachers Retirement Board

9 Teachers Retirement Board (12 Members) Dana Dillon Sharon Hendricks Harry M. Keiley State Controller Betty Yee State Treasurer John Chiang Director of Finance Michael Cohen Superintendent Tom Torlakson Joy Higa Paul Rosenstiel Thomas Unterman Nora Vargas Karen Yamamoto

10 CalSTRS Members by the Numbers As of June 30, 2016

11 CalSTRS Members by the Numbers As of June 30, 2016

12 Ratio: CalSTRS Active to Retired Members

13 Life Expectancy Rates: CalSTRS, CalPERS and Social Security For a member retiring at age Expected Age at Death Male Female Social Security (Year of Retirement ) CalPERS CalSTRS Note: CalSTRS life expectancy assumption was revised in 2017, while CalPERS last updated theirs in 2014.

14 Retirement Now Lasts Nearly 20 Years Life expectancy 8 years 19 years Full Social Security eligibility 22 yrs in retirement? Average retirement age Source: Center for Retirement Research at Boston College, 2006 and U.S. Social Security Administration, 2009.

15 CalSTRS Financial Status Assets: $202.8 billion (as of 3/31/17) Funding ratio: 63.7% (as of 6/30/16) Unfunded obligation: $96.7 billion (as of 6/30/16)

16 100% CalSTRS Projected Funded Status (Based on June 30, 2016 Actuarial Valuation) (Reflecting CalSTRS Board Decision to Lower Investment Return to 7%) 80% Funded Status 60% 40% 20% 0% Pre-Funding Plan Current Projection (Reflecting Rate Setting Authority Provided by AB 1469)

17 CalSTRS Top 10 Portfolio Holdings As of June 30, 2016 Security Name Shares Market Value ($) Security Name Shares Market Value ($) 15,221,475 $1,455,173,010 1,147,047 $820,849,774 1,687,897 $1,178,261,801 25,081,657 $789,570,562 20,965,031 $1,072,780,636 17,981,754 $776,991,590 11,397,213 $1,068,374,747 5, $758,860,317 8,163,447 $990,226,121 6,621,511 $756,706,277

18 30% 20-Year Performance of CalSTRS Investment Returns 20% 10% 0% -10% -20% -30% Actual Return Assumed Rate of Return

19 $2.3 BILLION CalSTRS Commitment to Infrastructure

20 Risk Mitigating Strategies Asset Class (RMS) Governor George Deukmejian Courthouse Long Beach, CA

21 Our Commitment to Sustainability 2015 Paris Pledge to Action at COP21. CalSTRS continues to be a proactive leader and role model in providing capital for sustainable development to make a measurable difference in reducing the footprint of greenhouse gas emissions on the planet. Green Team Report.

22 CalSTRS Divests from U.S. Thermal Coal In February 2016, CalSTRS divested from U.S. thermal coal companies and began engagement with foreign companies. Financial impact estimated at less than $1 million from holdings in the U.S. Equity and Fixed Income Portfolios, as of December 31, Divestment is consistent with CalSTRS fiduciary duty and the provisions passed in Senate Bill 185 (de León).

23 $500 MILLION CalSTRS Partners in Clean Energy Investments

24 CalSTRS committed up to $2.5 billion to low-carbon index.

25 CalSTRS as an Active Shareowner: Investing and Engaging over the Long Term

26 How Does Engagement Contribute to Long-Term Sustainability?

27 Divestment Divestment policy requires CalSTRS to first engage on the issue and confirm all avenues of influence have been exhausted before the board makes decision to divest. Last resort. Risk of adversely affecting the fund. Engagement vs. Divestment Engagement Need content Let s explore which road to take

28 Divestment Divestment Eliminates CalSTRS shareholder rights, voice and ability to advance positive change. Equivalent to quitting or turning our back on the issue and conversation. Divestment policy requires engagement first to exhaust all avenues of influence before the board makes a decision to divest. Engagement Undermines our long-term investment strategy.

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30 It's powerful to see CalSTRS headed in the right direction, joining investors around the world in understanding that the fossil fuel era is passing. That realization is good for the planet, and necessary for pensioners who rely on CalSTRS to exercise real foresight. Divesting from coal is a good step, and I assume oil and gas won't be far behind. Bill McKibben, author, environmentalist, activist and co-founder and chairman of the board of 350.org

31 Engagement Divestment Opportunity to positively impact portfolio companies and increase long-term value. Leverages CalSTRS investor position to move the needle and influence change through shareholder advocacy. Engagement stimulates dialogue and builds collaborative relationships. Engagement

32 Why Do We Engage?

33 Why Do We Engage? Risk management Fiduciary duty

34 ESG Factors: Responsible Investing Climate Change Risk Reporting Methane Gas Emissions Water Use Management Energy Efficiency Hydraulic Fracturing Waste Disposal Corporate/Board Diversity Indigenous Persons Rights Worker Health & Safety Conflict Minerals Palm Oil Sourcing Human Capital Majority Voting Standard Executive Compensation Board Independence Proxy Access Shareholder Voting Rights

35 How Do We Engage? Fiduciary Duty and Responsibility Fund Educator Retirement Benefits

36 The Power of Engagement CalSTRS as an Active Shareowner Although our exposure to public markets is through passive index investments, we are active shareowners.

37 Collaborative Partnerships With Institutional Investors

38 Advancing Majority Voting Standard CalSTRS Supporting Shareholder Interests CalSTRS Engagement Efforts Led to 98% Success in 481 Portfolio Companies

39 Voting Our Shares Shareholder voting, also known as proxy voting, is an important tool for investors to influence change in a company s operations and governance to enhance long-term value.

40 Voting Our Shares CalSTRS believes we have a fiduciary duty to treat our proxy votes as valuable assets of the plan.

41 Voting Our Shares

42 Examples of issues covered by shareholder proposals include:

43 Voting Our Shares Wells Fargo Annual Shareholder Meeting In April 2017, CalSTRS voted our 11.6 million shares against re-election of long-tenured WF board members for failing to identify weaknesses in risk/oversight mechanisms. Even thought the shareholder votes did not succeed and the directors were re-elected, CalSTRS continues to actively engage with Wells Fargo to enact change moving forward.

44 Diversity Leads to Increased Performance

45 How Diversity Correlates With Better Financial Performance Likelihood of financial performance above industry median, by diversity quartile Source: 2015 McKinsey & Company Report, Why Diversity Matters

46 Advancing Diversity on Corporate Boards Percentage of women on boards Progress toward greater diversity in boardrooms is being achieved, however, substantial female representation is still a mark of differentiation rather than the norm. Source: Credit Suisse Gender 3000 report

47 Advancing Diversity on Corporate Boards Facebook Board Composition February 2012: CalSTRS engaged Facebook in 2012, in the midst of their IPO, regarding the all-male board of director composition. We encouraged the addition of a female member to better represent Facebook s 58% female customer base. Our engagement efforts led to the addition of Sheryl Sandberg to the board in And in 2013, Susan Desmond-Hellman joined the Facebook board.

48 Methane Emissions Disclosure Initiative Methane, the primary component of natural gas, is a climate pollutant 84 times more powerful and potent than carbon dioxide. This means, methane traps 84 times more heat in the atmosphere than carbon dioxide. 84x More damaging than CO 2

49 The Global Impact of Methane Emissions Methane is responsible for 25 percent of the warming the earth is experiencing today.

50 Methane Emissions Engagement CalSTRS identified 14 oil and gas companies to improve disclosure of methane emissions risk management efforts. Engagement focused on EPA regulations and integrating emissions risk management into business plans. RESULTS: 8 out of 14 companies committed to enhancing and disclosing methane emissions risk management activities. The remaining 6 companies received shareholder proposals from CalSTRS. Subsequently, 2 of the 6 companies engaged with CalSTRS and the shareholder proposals were withdrawn. CalSTRS continues to engage with the other 4 companies.

51 Executive Compensation Say-on-Pay Engagement CalSTRS withheld support and engaged with Chevron in 2016 on their say-on-pay proposal. This was due to misalignment of pay-for-performance and a low threshold for performance shares compared to a high proportion of executive stock options. Ultimately Chevron s company performance is significantly affected by commodity prices, which could adversely impact the value of the investment. Result: 54% shareholder support.

52 Legislative and Regulatory Advocacy As a long-term investor, CalSTRS has a stake in the rules and regulations that govern the securities market in the U.S. and globally.

53 Legislative and Regulatory Advocacy

54 Legislative and Regulatory Advocacy CalSTRS comment letter made it clear that we expected the SEC to continue to prioritize the needs of investors as the underlying tenant and customer of any additions or changes to business and financial disclosures.

55 RETIREMENT Perception vs. Reality

56 Retirement Perspective PERCEPTION vs. REALITY I ll work part-time in my retirement years. 67% of workers expect to work for pay after retirement. Not if you don t save enough. 27% of retirees have worked for pay since retiring. Many expect to work part-time for enjoyment or to stay active, but a tough job market or health challenges could make working part-time a challenge.

57 88 percent of Americans say the nation is facing a retirement crisis. Source: NIRS, Retirement Security Study, March 2017

58 81 percent of Americans support pensions for public school teachers given their lower salaries. Source: NIRS, Retirement Security Study, March 2017

59 Let s test your retirement knowledge

60 Question #1: Roughly how much do investment professionals say people should save by the time they retire?

61 Question #2: How often over the past 35 years do you think the market has had a positive annual return?

62 Question #3: Given the current average life expectancy, if you want to retire at age 65, about how long would you need your retirement savings to last?

63 Question #4: Approximately how much did the average monthly Social Security benefit pay in 2016?

64 Question #5: About what percentage of your savings do many financial experts suggest you withdraw annually in retirement?

65 Retirement Planning Heaven or Hell?

66 Chipmunk s Plan For Future Better Crafted Than That Of 8 Out Of 10 Americans You Decide Fake News or Not?? 80 percent of our human subjects were entirely incapable of looking beyond their next meal or that night s television programming

67 How Much Money Do You Think You Will Need for Retirement?

68 Amount of Retirement Savings Americans Think They Need Source: EBRI, 2015 Retirement Confidence Survey

69 And Reality Hits Average 401(k) Balances Source: Vanguard, How America Saves 2016

70 Retirement Has the Highest Price Tag Source: CollegeData.com, 2016; USDA/Consumer Expenditure Survey, 2014; U.S. Census Bureau, ; Fidelity.com

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73 Top Reasons for Working in Retirement Source: Age Wave/Merrill Lynch, Work in Retirement: Myths & Motivations, 2014; Base: Age 50+ working retirees; select all that apply

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