Bloomberg News

California Pension Funds, Nation’s Largest, Gain Most in Decade

July 18, 2011

July 18 (Bloomberg) -- The nation’s two largest public pension systems reported returns topping 20 percent for the year ended June 30, their best in more than a decade as the California funds profited from stocks and private equity.

The California Public Employees’ Retirement System, or Calpers, the U.S.’s biggest pension, earned 20.7 percent in the 12 months ended June 30. It was the best result in 14 years, led by gains in stocks and private equity. The California State Teachers’ Retirement System, the second-largest, earned 23.1 percent, it said in a press release.

Stocks held by the first plan, which has $237.5 billion of assets, returned 30.2 percent, fund administrators said today. Fixed-income investments rose 7 percent. Real estate and private equity, earned 10.2 percent and 25.3 percent through March, respectively.

“Obviously the results are pleasing,” the Chief Investment Officer Joe Dear told the governing board today at a meeting in Petaluma, north of San Francisco. “We are in the 20 percent club. It was a good year. We are back.”

The results may help Calpers parry concern that it relies on overly optimistic return assumptions that hide the size of its deficits. The fund lost almost a quarter of its value in 2009 as the global recession dragged down stock prices and real estate values.

Even with the gain, the pension fund has earned 3.41 percent annually on average in the past five years, 5.36 percent in the last 10 and 7.11 percent over 15 years. It has gained 8.38 percent annually over 20 years.

Spread Out

While the fund expects to earn 7.75 percent annually to meet its obligations, it spreads out gains and losses over 15 years to smooth out potential spikes and dips in how much the fund must ask from taxpayers each year to pay for employer contributions for public-employee pension benefits.

Pensions such as Calpers have benefited from the stock market’s rebound since March 2009, when the Standard & Poor’s 500 Index touched a 12-year low. The index was little changed in the second quarter, after gaining 5.4 percent from January through March. The gauge of U.S. equities climbed almost 13 percent last year and 23 percent in 2009.

The return by Calstrs, with $154.3 billion in assets, was the highest since 1986.

Asset Mix

Calpers invests about 49 percent of assets in stocks, 20 percent in bonds, 14 percent in private equity, 10 percent in real estate and 5 percent in inflation-linked assets such as commodities. It tries to keep 2 percent in cash.

The fund gained 13.3 percent in fiscal 2010 after losing 23.4 percent in 2009, the biggest drop in the pension’s 79-year history. It lost 4.9 percent in 2008 after a 19.1 percent climb in 2007.

Calpers had assets of about $225 billion when Lehman Brothers Holdings Inc. went bankrupt in September 2008, leading to a panic that wiped out more than $6 trillion in U.S. stock- market value in about six months. Calpers value plummeted to $164.7 billion by Jan. 31, 2009. It had reached $251 billion at the end of June 2007, climbing to a record of about $260 billion in October of that year, just before the global recession began.

The 13-member Calpers board in March voted to keep the expected rate of return on assets at 7.75 percent. They rejected a recommendation from actuaries to lower it to 7.5 percent, which was based on projections for market returns to trail historical averages.

Some board members expressed concern at the time that a lower rate would have burdened local governments by forcing them to put more cash into the fund as they were already facing financial strains.

Once Fully Funded

Calpers in January said it had only about 70 percent of the money it needs to cover benefits promised to government workers when they retire. The pension was fully funded when the recession began in December 2007.

Taken as a whole, 215 public pensions in the U.S. have 76.1 percent of the assets needed to meet projected obligations, on average, according to a survey released in June by the National Conference on Public Employee Retirement Systems in Washington.

Calstrs averages its investment returns over three years to determine how close its assets come to meeting anticipated obligations to retirees. Because of a 25 percent loss in 2008- 09, the system’s three-year return is 0.98 percent, which lags behind the 7.75 percent Calstrs has calculated it needs to meet its long-term obligations to retirees, the press release said.

“Solid performance in the past two fiscal years puts some wind in our sails, but it doesn’t make up for a lost decade of returns,” Chief Investment Officer Christopher J. Ailman said in the press release, referring to the 2000s.

The New York State Common Retirement Fund, the third- largest U.S. public pension plan with $146.5 billion, returned an estimated 14.6 percent for the year ended March 31, Comptroller Thomas DiNapoli said July 14.

--With assistance from James Nash in Sacramento. Editors: Ted Bunker, Mark Schoifet, Mark Tannenbaum

To contact the reporter on this story: Michael Marois in Sacramento at

To contact the editor responsible for this story: Mark Tannenbaum at

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