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CalSTRS’ actuarial staff recommends lowering assumed rate of return to 7.25%

Board to vote on the reduction on Feb. 1; cutting to 7% also on the table

Christopher Ailman
CalSTRS Chief Investment Officer Christopher Ailman

CalSTRS’ actuarial staff is recommending lowering the pension fund's assumed rate of return to 7.25% from 7.5% because of diminished market and inflation assumptions.

The recommendation is contained in agenda materials for the $196.4 billion defined benefit plan's board meeting in San Diego on Feb. 1, at which time a vote is scheduled on the matter.

“There is less than 50% probability that the current 7.5% return assumption for the DB program will be achieved over the long term,” the recommendation said.

The recommendation also changes the California State Teachers' Retirement System's long-term inflation assumption to 2.75% from 3%, noting that over the past 20 years, “actual price inflation has been lower and is expected to remain below 3% in the future.”

The proposed reduction is part of a national trend by public pension plans to lower assumed rate of return assumptions in light of cloudy future capital market assumptions.

In December, the $306.6 billion California Public Employees' Retirement System, Sacramento, approved lowering its rate to 7% from 7.5% in a staggered reduction over the next three years.

While the in-house actuarial staff of the West Sacramento-based pension fund recommends the board approve the 7.25% rate of return, it does not rule out going down to 7%.

“Going to 7% would be an acceptable alternative if the board wanted to add another level of conservatism in the actuarial assumption by increasing the likelihood the investment assumption will be met long term,” the staff recommendation said.

The staff recommendation to lower the assumed rate of return comes after a study by the pension plan's consulting actuary, Milliman.

Milliman recommends lowering the rate of return to 7.25% but also says “it would be reasonable” to lower the investment return to 7%.

“The argument for doing that is that although we may expect a 7.25% return over the next 20 years, the general consensus is that returns in the next 10 years are expected to be lower,” the study said. “As much as any of these projections are certain, the board may want to give a greater weight to the near term, since the board may feel that it has a higher likelihood of being realized than the higher returns expected after 10 years.”