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CalPERS Holds Assumed Return Rate at 7.75%
Jeannette Neumann of the WSJ reports, Calpers Committee Holds Assumed Return Rate at 7.75%:
A
committee at Calpers on Tuesday decided to maintain the pension fund
giant's annual assumed rate of return on investments, despite an
actuary's recommendation to switch to a lower rate.
The committee
of the California Public Employees' Retirement System decided to
recommend maintaining the rate at 7.75%, instead of adopting the recommendation by Calpers's chief actuary to lower the rate to 7.5%.
The committee's recommendation still has to be approved by the fund's board.
The board is scheduled to meet Wednesday.
A
Calpers spokeswoman said a main factor behind the vote was a push by
local governments to maintain the status quo. A decrease, the
spokeswoman said, could have bumped up the amount of money public
employers pay toward government workers' pensions.
The vote by
the committee at Calpers, the biggest public pension fund in the U.S.,
with nearly $230 billion in assets, comes as public retirement plans
across the country are facing pressure from academics and policy makers
to lower their annual assumed rates of return on investments.
Critics blame too-rosy rates for contributing to state pension shortfalls, estimated at more than $1 trillion nationwide.
A
decrease in the Calpers rate of return to 7.5% would have bumped up
what local California governments pay on behalf of government workers
by 1.5% to 3% of payroll costs each year and 3% to 5% of what they pay
on behalf of police officers, firefighters and other public-safety
officers, a Calpers spokeswoman said.
Also,
a decrease in the rate, also referred to by public pension plans as
the discount rate, drives down the funded status of a pension plan, or
the difference between its assets and long-term liabilities. Calpers is
about 70% funded, it says.
Despite his recommendation,
Calpers's chief actuary, Alan Milligan, said keeping the discount rate
at 7.75% is "reasonable and achievable and appropriate for funding the
promised benefits," according to a statement on the Calpers website.
Public
pension plans have a median annual assumed rate of return of 8%,
according to a recent report by Wilshire Associates, an investment
consulting firm. Calpers lowered its rate to 7.75% from 8% in 2004.
Pension
plans are typically funded by investment returns as well as
contributions from public employers and government workers. Pension
plans considering the adoption of a more-conservative annual rate of
return are faced with having to shift a greater financial burden on to
public employers, since typically contributions from employees legally
can't be changed.
That is a tough sell to state and local governments, faced with steep budget shortfalls and sluggish tax revenue.
About
ten public employers attended Calpers' committee meeting Tuesday, and
the fund also received several letters urging officials to maintain the
discount rate, a spokesman said.
I
already stated that an assumed return rate of 7.75% is too high and so is
7.5%. US ten-year bonds are yielding 3.3%, which means in order to
achieve that 7.75% over the long-term, CalPERS will have to take risks
in both public and private markets. It's not impossible but taking on
more risk means the fund is vulnerable to another big drawdown similar
to the one it experienced in 2008. With each sizable drawdown comes the
risk that the fund's deficit will grow even wider. That's the problem with
assuming a rate of return that's not easy to achieve.
»
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***UPDATE***
David Reilly of the WSJ reports, California Still Dreamin' on Pensions:
50-50 chance that returns will be either higher or lower? I think it's safe to assume that without taking considerable risk in public and private markets, it's going to be next to impossible to achieve 7.75% over the long-run. And more risk leaves the fund exposed to more downside risk. Again, if CalPERS was fully funded, this wouldn't be as much of a concern, but now that it's only 70% funded, it's margin of error has been reduced. If those investment assumptions don't pan out, taxpayers are on the hook.
If those investment assumptions don't pan out, taxpayers are on the hook.
Nope, not gonna happen.
Let me be real clear about this Leo and all you government leeches out there: The status quo has ended. Your taxpayer-guaranteed pensions are history. Wisconsin was the targeting round. They're scoped in and it's fire for effect now. Enjoy huddling in your foxholes listening to shells whizzing over. Subsequent volleys will find your foxhole. It's just a matter of time.
LMAO! Big fucking surprise there alright!
Kick the can down the road. These guaranteed pensions can take a haircut or get 100% of zero
It's going to be 100% of zero.
They should set it at 6.66%.
Just checked... since 1990, it would have been 8.65% average annual return if they had simply used a dead-simple 50-50 S&P/global bond index allocation. And they wouldn't have had to pay a damn thing to consultants, fund-of-funds managers, etc.
Could run the whole thing for a couple of thousand bucks a year, total transparency because any citizen could look in the newspaper and see how it did the day before. Yes, I know, feature, not bug.
U.S. Retirement Assets Total $15.6 Trillion in Third Quarter
Washington, DC, February 3, 2010 - Americans held $15.6 trillion in retirement assets at the end of the third quarter of 2009, accounting for 35 percent of all household financial assets in the United States, the Investment Company Institute reported today.
The finding is from “The U.S. Retirement Market, Third Quarter 2009.” The report covers assets held in private-sector defined benefit (DB) plans, government pension plans, defined contribution (DC) plans—including 401(k), 403(b), and 457 plans—annuities, and individual retirement accounts (IRAs). Between June 30, 2009, and September 30, 2009, retirement assets rose 7.9 percent, from $14.4 trillion to $15.6 trillion. During the third quarter, total return on equities was 15.6 percent, while bonds returned 3.6 percent, according to the Standard & Poor’s 500 stock index and the Citigroup Broad Investment Grade Bond Index.
Now here's the problem I have. If everyone holding retirement assets expects growth of 7.75% then we're talking about a ~$trillion dollar growth in wealth every year just for these assets. Considering all the assets in the U.S. everyone is expecting about half a GDPs worth of wealth creation every year. Is someone smoking something somewhere?
More folks in denial. This should end well. Sure, they may get that return, but what will inflation look like? What will the buying power of those pensions be?
Calpers can easily make this with PIG bonds and they are backed by the full faith and credit of the world. Go for it! All in!
Or even better they can just issue new CA State bonds at 10% and steal all the money out of CALPERS today. You know because the state of CA is good for it. They're good enough to hire these people and make these promises so why not just bankroll the whole pension, take the money out and use it for real economic boosting programs like worker retraining, AFDC, school meals and green energy?
We've been told for years that these are all good investments so go for it.
Or even better they can just issue new CA State bonds at 10% and steal all the money out of CALPERS today. You know because the state of CA is good for it. They're good enough to hire these people and make these promises so why not just bankroll the whole pension, take the money out and use it for real econimic boosting programs like worker retraining, AFDC, school meals and green energy?
We've been told for years that these are all good investments so go for it.
Hey, splendid idea, let those liberal state employees fund their beloved AFDC, "green energy" and similar leftist initiatives they whine about with Calpers funds
...which isn't their money, it's taxpayer's money, it's a defined benefit plan taxpayers pay for, not a defined contribution plan they pay for, they have no claim on that money.
You clowns play with other peoples money. Grow on a real life.
Since they are in for a penny as the saying goes, Calpers should take the opposite tack and raise their return assumptions ... If they raised to let's say,
8%, (wow, not even a whole percentage point) think of the incredible savings the State of CA would realize ...
Ponzinomics, Chapter I
7.75% is too low. I'm thinking more like 10%.
1/4 will be real growth. 2.5%.
3/4 wil be inflation. 7.5%. From QE-inflated equities, things like that. Bernokio running the printing presses. I fully anticipate seeing Dow 35,000 in the not-too-distant future.
True consumer price inflation will be 15%, meaning Calpers will be losing 5% per year in real purchasing power. Retirees getting a monthly pension check will lose 13% per year in real purchasing power, assuming they get a 2% CPI-based COLA.
If true consumer price inflation is 20%, like it is now, Calpers will be losing 10% per year in real purchasing power. Retirees getting a monthly pension check will lose 18% per year in real purchasing power, assuming they get a 2% CPI-based COLA.
If true consumer price inflation is 30%, very possible with QE-3, 4, 5, 6, 20, 30, etc, Calpers will be losing 20% per year in real purchasing power. Retirees getting a monthly pension check will lose 28% per year in real purchasing power, assuming they get a 2% CPI-based COLA.
That's why ALL pension funds and retirees are fucked. No pension fund is going to grow fast enough to keep up with true consumer price inflation. No retiree's monthly pension check is going to grow fast enough to keep up with true consumer price inflation.
On top of that, ALL pension plans, public, private, whatever, are going to be looted dry by the federal government and Wall Street in the coming "national financial emergency", leaving those plans BROKE, BUSTED.
THAT'S why lot's of people are warning folks to CASH OUT their 401k, IRA, etc. If they don't, it's going to be CONFISCATED in the coming "national financial emergency". 1
Sadly, public pension fund participants can't cash out. They're completely fucked.
1 Federal government sanctioned retirement plans were originally created so people could pour money into them for years and the federal government could confiscate them in a fabricated "national financial emergency", likely right before the federal government declares force majeure and defaults.
P.S.
Leo is fretting over deck chair arrangement on the Titanic.
It's all going to sink.
I predicted this back when 401(k)s were first invented. A couple years ago Pelosi made some faint remarks referencing confiscation. I fear that, like Nixon going to China, confiscation is only something a Republican Congress will do. A few years from now, in the dead of night.
You've been warned.
They are not going to confiscate it by decree.
They are going to confiscate the values in these plans through debasement of the currency.
It's the simplest thing in the world. The Bernenk prints dollars, floods the system with paper that becomes more and more worthless until no one will accept a dollar in trade for anything.
At that point all dollar denominated retirement plans will be broke having been looted by the Fed in plain view with cheering from all the Wall Street shills.
+55
Confiscation by another name.
7.75? There is no data suggesting this is at all likely given current Shiller P/E of 24. Indeed, look at the 10 year returns/likelihood when starting P/E is at the following levels:
Add in the fact that boomers are retiring and that the next generation, burdened by falling wages, global wage competition, disappearing state subsidies, excessive student loans and little or no inheritance after most of their boomer parents failed to plan for their own retirement, are not likely to make the same investments in the stock market, and you get probably a 99% chance of average annual returns of less than 5%.
Don't matter at all...let em assume 75%...who gives a shit! The money isn't there, won't be there and the taxpayeers won't pay. The pubic employees will get a shit sandwich instead. They deserve it.
On Planet Print 7.75% is easily attainable-that's a bet that any Zimbabwean stock broker will take, except CA pensions are indexed to inflation, and not that BS govt inflation number but one the CA public employees defined themselves.
The EU just committed to printing another 440B euros, the Japs are printing away too, China (we are China), is there any doubt we wont match and raise their printing?
"Wizard of OZ tells Munchkins curtain is made of gold and he has 10" erection"
7.5%, 7.75%, 8%, who cares its still no where near reality, when they are falling off the cliff and have forced a crisis, then they'll expect the Fed to bail them out which they'd do.
Too bad it wasn't set at 7.77%
That way we could assume it would all be bet in Vegas on the slots!
With $230 billion you may not make 7.77%, but everyone would be sure to get a free buffet or a chicken dinner.
I think a lot of the pension funds have unrealistic assumptions which is a real problem and why Wisconsin is important.
"Socialists get elected making promises they can't possibly keep by telling gullible people what they want to hear, which is, that they can get something for nothing." --Thomas Sowell, economist, thinker, and former Marxist.
You may not want Reality, but Reality wants you!
Unbelievable.
Anyone with a fully functioning brain knows 0% is too high because wealth creation tracks energy consumption which is going down. If you are 100% gold then you might be able to plan on 0%.
Anyone with a partially functioning brain might be able to make an argument for 3-4% based on history, but not 7%.
Idiots.
Does silver count?
Exactly.
Fuck the margin! Risk on, baby! Roll that ponzi!!!
Roll the Ponz...
Roll it on up to the next IMF level...
Roll, Cue-ball Bernank, roll...
Looking, from today, at any timeline from 1 to 10 years, what portfolio suitable for a pension fund (however large and purportedly sophisticated) could realistically be expected to deliver 7.75% annualized?
I'd be happy if I could lock in a fairly safe 6% at this point.
Leo and I have been going at this for a bit. I think Capers is out of its mind with 7.75%. The events of just the past few months/years prove that we live in unstable times. While it is possible to make a nice return one year, the idea that it can be done on a sustained basis is simply not borne out by the facts.
Low rent, scum sucking liars. They are cheating the people in Cali. They are making promises they can't deliver on.
"They are making promises they can't deliver on."
You mean like Washington and Wall Street?
Exactly.
Absolutely right, Bruce. This is why I rent in LA.
7.75% is insane in a world of 1.7% equity yield and 3.4% 10-year treasury yield. Even high-yield is offering 6.75%, gross of fee and defaults.
Insanity.
Inflation will ride in and save the day!!! Ben Bernanke FTW!
shit storm is really brewing...
Absolutely Fucking Amazing that they are afraid to even lower it a lousy quarter !!!.....
The committee members wouldn't want to have union thugs showing up at their doorsteps by the busload to harass them and their families, would they? So much easier to kick it just a little farther down the road.
just a recommendation from wall street so they will continue to pump money to them and not ask what the hell they are doing
another stupid shill comment. actually, this has nothing to do with wall street and everything to do with union politics in CA. understand the issues before you work from dated talking points. CA is not going to even consider asking its most vocal political lobby to pay more; that responsibility falls on the Republic of California taxpayers' shoulders.