Bloomberg News

Calpers Committee Proposes Lowering Rate of Return to 7.5%

March 13, 2012

A committee of the California Public Employees’ Retirement System rejected a proposal by its actuary to lower its assumed investment rate of return to 7.25 percent, opting instead for a smaller reduction.

The Pension and Health Benefits Committee recommended that the biggest public U.S. retirement system drop its annual return estimate to 7.5 percent from 7.75 percent. Actuary Alan Milligan has proposed the board lower the rate to 7.25 percent. The full board will consider the recommendation tomorrow.

A lower return rate would drive up what the fund, known as Calpers, requires from taxpayers to provide benefits for more than 1.6 million employees, retirees and their families. Public funds have come under fire for using higher investment assumptions that hide the true size of shortfalls. The $233.9 billion fund last adjusted its rate of return in 2004, to 7.75 percent from 8.25 percent.

“At least this a move in the right direction, but we are still kicking the can down the road,” said board member Dan Dunmoyer.

Milligan told the committee before the vote that the fund had a 50 percent chance it would meet the 7.5 percent return over the next two decades. At 7.25 percent, that chance would increase to more than 50 percent, he said.

State Costs

California will spend $3.5 billion in the current fiscal year that ends June 30 to cover the cost of state worker pension benefits. The 7.5 percent means the state will have to pay about $167 million more in the coming fiscal year, instead of $425 million had the board lowered the rate to 7.25 percent, Milligan said.

The board rejected a proposal by Milligan one year ago to reduce the rate to 7.5 percent. Board members at the time expressed concern that lowering the rate to 7.5 percent would burden local governments when they were already facing financial strains.

“Continuing to assume something that probably is not realistic is simply kicking the can down the road,” said board member George Diehr.

The pension fund estimates that it has about 70 percent to 75 percent of the money it needs to cover promised benefits. That differs from a Stanford University report that said Calpers was only 58 percent funded, based on a 6.2 percent annual return on assets.

The fund earned 1.1 percent in the calendar year that ended Dec. 31 as global equities dropped, compared with a gain of 2.1 percent for the Standard & Poor’s 500 Index of U.S. shares including reinvested dividends.

Teachers’ Fund

Calpers earned almost 5.1 percent over a decade and 7.5 percent in the past 20 years, according to Joe Dear, the system’s investment chief.

The California State Teachers’ Retirement System, the second-largest U.S. public pension with $148.9 billion of assets, agreed Feb. 2 to lower its assumed returns to 7.5 percent from 7.75 percent, the second reduction since 2010.

To contact the reporter on this story: Michael B. Marois in Sacramento at mmarois@bloomberg.net

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net


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