Bloomberg News

Calpers Investment Chief Says 7.75% Return May Be Tough to Meet

September 29, 2011

Sept. 29 (Bloomberg) -- The California Public Employees’ Retirement System, with half its money in equities, will be hard-pressed to return 7.75 percent this year as the weak U.S. recovery and deepening debt crisis in Europe weigh on global stocks, its investment chief said.

Calpers, the largest U.S. public pension fund, assumes it will earn an average of 7.75 percent annually to meet its obligations. It spreads losses and gains over 15 years to blunt the impact that annual swings may have on the amount of money the fund charges taxpayers to finance retirement benefits for government workers.

“That’s going to be tough this year and maybe for the next few years,” Calpers Chief Investment Officer Joe Dear said in a Bloomberg Television interview yesterday. “This low-return environment is structurally driven, and there’s not a lot of policy to move it.”

The fund earned 20.7 percent in the 12 months ended June 30, its best result in 14 years, led by gains in stocks and private equity. Since then, Calpers’s value has dropped by $20 billion to $218.6 billion as of Sept. 26, as global stocks declined 18 percent.

Even with the fiscal 2011 gains, the pension fund has earned 3.41 percent annually on average in the past five years, 5.36 percent in the last 10 and 6.97 percent in the last 15. It has only beaten its assumed rate of return with a 20-year average of 8.38 percent annually.

Nationwide, state pensions will achieve a median annual return of 6.5 percent in the next 15 years, according to a February study by Wilshire Associates, the Santa Monica, California, investment adviser.

‘Absolutely Confident’

“Do I think its achievable over the long term, the 15 to 20 year horizon? I’m absolutely confident about that,” Dear said yesterday in a follow-up telephone interview.

The fund’s governing board in March decided against a recommendation by its actuaries to reduce its assumed rate of return on the expectation that markets would trail the historical average. The fund lost almost a quarter of its value in 2009 as the global recession dragged down stock prices and real-estate values.

“Once you look at a significant length of time, the cycles smooth out and a portfolio with a patient, disciplined approach will produce a return that matches our expectation of 7.75 percent,” Dear said.

70% 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.

Dear said the fund will look beyond stocks to its other asset classes, such as private equity, hedge funds and infrastructure, to help boost returns.

Calpers has about 14 percent, or $33.6 billion as of June 30, invested in private-equity funds, which returned 25.3 percent through the end of that month.

“We are in a low-return environment with a lot of downside risk right now,” Dear said. “You need to be realistic about the prospects and you need to ask what are the alternatives that might produce a better return than a classic stock-bond portfolio.”

--With assistance from Andrea Riquier in New York. Editors: Pete Young, Ted Bunker

To contact the reporters on this story: Michael B. Marois in Sacramento at; Scarlet Fu in New York at

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

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