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CalPERS Holds Assumed Return Rate at 7.75%

Leo Kolivakis's picture





 

Via Pension Pulse.

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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Wed, 03/16/2011 - 19:50 | Link to Comment Leo Kolivakis
Leo Kolivakis's picture

***UPDATE***

David Reilly of the WSJ reports, California Still Dreamin' on Pensions:

Pass out the rose-colored glasses.

 

The California Public Employees' Retirement System chose Wednesday to leave its assumed rate of investment return unchanged at 7.75%. That was against its own actuary's recommendation to lower it to 7.5%.

 

The move will please strapped local governments. A cut would have caused the system's liabilities to rise, deepening its funding hole and requiring increased contributions from states and municipalities with staff covered by the system. For the state of California alone, this could have meant $400 million a year more in contributions.

 

But that may be little solace to taxpayers, who could be left holding the bag years from now if the hoped-for returns don't pan out.

 

It also shows how pension funds still hope the long-term investment outlook hasn't undergone a lasting change. Instead, funds are betting they can replicate past performance.

 

On average, public pension funds expect to generate an 8% average annual return. This despite the fact stock markets have essentially flat-lined over the past decade, bond yields are at historic lows, and prior gains were in many cases because of the Internet, housing and credit bubbles.

 

Should Calpers—the biggest public pension fund in the U.S., with assets of about $228 billion—fall short of its expectations, it could find itself in an even deeper hole. The system's main retirement pool is only about 70% funded. That is up from about 60% as of June 30, 2009, but it has only been fully funded in three out of the past 10 years.

 

In leaving its rate unchanged, Calpers cited the fact that, over 20 years, it has posted an average annual return of 7.9%, before administrative and investment expenses. And the system said it based its future outlook on an analysis of 10,000 investment scenarios over 60 years. These resulted in an expected average annual return of 7.95%.

 

As the financial crisis showed, though, unexpected events can easily make such models irrelevant. Calpers itself said there is a "50-50 chance that returns will be either higher or lower" than the scenario analysis projected.

 

For taxpayers, those aren't great odds.

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.

Thu, 03/17/2011 - 09:35 | Link to Comment cranky-old-geezer
cranky-old-geezer's picture

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.

Wed, 03/16/2011 - 13:38 | Link to Comment Yancey Ward
Yancey Ward's picture

LMAO!  Big fucking surprise there alright!

Wed, 03/16/2011 - 09:53 | Link to Comment cocoablini
cocoablini's picture

Kick the can down the road. These guaranteed pensions can take a haircut or get 100% of zero

Wed, 03/16/2011 - 12:31 | Link to Comment cranky-old-geezer
cranky-old-geezer's picture

It's going to be 100% of zero.

Wed, 03/16/2011 - 09:28 | Link to Comment Ayn Rand
Ayn Rand's picture

They should set it at 6.66%. 

Wed, 03/16/2011 - 09:24 | Link to Comment ZackAttack
ZackAttack's picture

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.

Wed, 03/16/2011 - 09:12 | Link to Comment Stuck on Zero
Stuck on Zero's picture

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?

 

Wed, 03/16/2011 - 08:49 | Link to Comment LawsofPhysics
LawsofPhysics's picture

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?

Wed, 03/16/2011 - 08:27 | Link to Comment Papaneuf
Papaneuf's picture

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!

Wed, 03/16/2011 - 08:46 | Link to Comment ATM
ATM's picture

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.

Wed, 03/16/2011 - 08:45 | Link to Comment ATM
ATM's picture

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.

Wed, 03/16/2011 - 12:28 | Link to Comment cranky-old-geezer
cranky-old-geezer's picture

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.

Wed, 03/16/2011 - 07:24 | Link to Comment Yen Cross
Yen Cross's picture

You clowns play with other peoples money. Grow on a real life.

Wed, 03/16/2011 - 05:52 | Link to Comment Dollar Bill Hiccup
Dollar Bill Hiccup's picture

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

Wed, 03/16/2011 - 07:29 | Link to Comment cranky-old-geezer
cranky-old-geezer's picture

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.

Wed, 03/16/2011 - 12:21 | Link to Comment cranky-old-geezer
cranky-old-geezer's picture

P.S. 

Leo is fretting over deck chair arrangement on the Titanic.

It's all going to sink.

Wed, 03/16/2011 - 08:05 | Link to Comment BearOfNH
BearOfNH's picture

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".

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.

Wed, 03/16/2011 - 08:40 | Link to Comment ATM
ATM's picture

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.

 

 

Wed, 03/16/2011 - 10:07 | Link to Comment Hedgetard55
Hedgetard55's picture

+55

 

Confiscation by another name.

Wed, 03/16/2011 - 03:49 | Link to Comment narnia
narnia's picture
One sided recognition of inflation is precisely the game being played by unions in their "position" that the state & local pension systems around the country are solvent.  OK, Calpers may see a 7.75% nominal rate of return, but if they do 3-6% of that will be directly related to inflation that they will be obligated to pay on the liability side (these are defined benefit obligations).   Real estate values in California will not be coming back any time soon.  It's plausible they may be retracting 20% more.  We all know the municipal cost of borrowing is about to go ballistic.  These states, and especially California, are throwing band aids on a sinking ship. 
Wed, 03/16/2011 - 02:39 | Link to Comment goodrich4bk
goodrich4bk's picture

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%.

Wed, 03/16/2011 - 02:21 | Link to Comment Korg
Korg's picture

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.

Wed, 03/16/2011 - 01:32 | Link to Comment SmittyinLA
SmittyinLA's picture

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?  

Wed, 03/16/2011 - 01:14 | Link to Comment ebworthen
ebworthen's picture

 

"Wizard of OZ tells Munchkins curtain is made of gold and he has 10" erection"

 

Wed, 03/16/2011 - 01:13 | Link to Comment tiger7905
tiger7905's picture

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.

Wed, 03/16/2011 - 00:46 | Link to Comment ThirdCoastSurfer
ThirdCoastSurfer's picture

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. 

Wed, 03/16/2011 - 00:28 | Link to Comment gwar5
gwar5's picture

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. 

 

Wed, 03/16/2011 - 00:23 | Link to Comment PulauHantu29
PulauHantu29's picture

You may not want Reality, but Reality wants you!

Wed, 03/16/2011 - 00:16 | Link to Comment Peak Everything
Peak Everything's picture

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.

Wed, 03/16/2011 - 00:50 | Link to Comment Broomer
Broomer's picture

Does silver count?

Wed, 03/16/2011 - 00:21 | Link to Comment Mr Lennon Hendrix
Mr Lennon Hendrix's picture

If you are 100% gold then you might be able to plan on 0%.

Exactly. 

Tue, 03/15/2011 - 23:52 | Link to Comment Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Fuck the margin!  Risk on, baby!  Roll that ponzi!!!

Wed, 03/16/2011 - 03:22 | Link to Comment Problem Is
Problem Is's picture

Roll the Ponz...

Roll it on up to the next IMF level...

Roll, Cue-ball Bernank, roll...

Tue, 03/15/2011 - 23:42 | Link to Comment Mad Max
Mad Max's picture

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.

Tue, 03/15/2011 - 23:40 | Link to Comment Bruce Krasting
Bruce Krasting's picture

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.

 

Wed, 03/16/2011 - 01:18 | Link to Comment ebworthen
ebworthen's picture

"They are making promises they can't deliver on."

You mean like Washington and Wall Street?

Exactly.

Wed, 03/16/2011 - 00:31 | Link to Comment infiniti
infiniti's picture

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.

Tue, 03/15/2011 - 23:55 | Link to Comment potatomafia
potatomafia's picture

Inflation will ride in and save the day!!!  Ben Bernanke FTW!

 

 

shit storm is really brewing...

Tue, 03/15/2011 - 23:38 | Link to Comment Seasmoke
Seasmoke's picture

Absolutely Fucking Amazing that they are afraid to even lower it a lousy quarter !!!.....

Wed, 03/16/2011 - 09:29 | Link to Comment Gene Parmesan
Gene Parmesan's picture

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.

Tue, 03/15/2011 - 23:38 | Link to Comment I am a Man I am...
I am a Man I am Forty's picture

just a recommendation from wall street so they will continue to pump money to them and not ask what the hell they are doing

Wed, 03/16/2011 - 08:30 | Link to Comment gringo28
gringo28's picture

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.

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