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CalPERS passes risk mitigation plan to further lower assumed rate of return in the future

The CalPERS board approved Wednesday a new risk mitigation plan that aims to further lower the assumed rate of return long term below the 7% agreed to in December.

The new plan puts focus on reducing the investment portfolio's vulnerability to a market downturn but won't go into effect until the fiscal year that starts July 1, 2020. Its implementation will follow the completion of staggered decreases over the next three fiscal years ending June 30, 2020, that will take CalPERS' rate of return to 7% from the current 7.5%.

Under the risk mitigation plan, the $308 billion pension fund's rate of return would be lowered by 5 basis points if the retirement system earned an investment return of at least 9%.

Larger investment returns in a fiscal year would mean a larger reduction in the rate of return.

A 14% investment return would mean a reduction of 10 basis points in the rate of return; a 17% investment return would mean a 15-basis-point reduction, a 20% investment return, 20 basis points; and a 24% return would lower the assumed rate by 25 basis points.

As CalPERS lowers the return, the goal is for the system to shift its portfolio to safer assets to reduce volatility.

The board of the California Public Employees' Retirement System, Sacramento, had originally passed a risk mitigation plan in October 2015, but the plan's fate was put in limbo when the board in December decided a more aggressive course of action was needed and lowered the rate of to 7%.

The board took that action after hearing diminished capital market forecasts for the next decade from its investment consultants. The board concluded the 7.5% rate of return was unrealistic.

The fund's investment staff has been involved in an ongoing process of cutting CalPERS' allocation to riskier investments such as stocks and increasing allocations to inflation-protected bonds and commodities, a move that will likely constrain returns in up markets but reduce losses in down markets.