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.