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.