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Pension Funds

CalPERS adopts new asset allocation increasing equity exposure to 50%

CalPERS' investment committee approved a new asset allocation plan on Monday that is fairly similar to the current allocation, with the equity allocation rising to 50% from 46%.

The new allocation, which goes into effect July 1, 2018, supports CalPERS' 7% annualized assumed rate of return. The investment committee was considering four options, including one that lowered the rate of return to 6.5% by slashing equity exposure and another that increased it to 7.25% by increasing the exposure to almost 60% of the portfolio.

A lower rate of return means more contributions from cities, towns and school districts to CalPERS. Those governmental units are already facing large contribution increases — and have complained loudly at CalPERS meetings — because a decision by the $345.1 billion pension fund's board in December 2016 to lower the rate of return over three years to 7% from 7.5% by July, 1, 2019.

Under the plan adopted Monday, the California Public Employees' Retirement System will have a 28% weighting to fixed income, up from 20%. However, the current 9% allocation to inflation assets, which is largely made up fixed-income instruments such as inflation-linked bonds, is being merged with the fixed-income asset class.

Real assets, which includes real estate, will keep its 13% allocation, while private equity remains at 8%. CalPERS' liquid portfolio, made up of cash and other short-term instruments, will fall to 1% from 4%.

There was one dissenting vote on the 13-member committee, J.J. Jelincic, who argued that CalPERS could take its equity level to almost 60% because it was a long-term investor that could weather ups and downs in the portfolio. By being more aggressive in its portfolio, CalPERS could earn a higher rate of return over the longer term, he said.

Under the more aggressive option favored by Mr. Jelincic, CalPERS staff estimates it could earn annualized rate of 7.25% over the next 60 years.

Other board members said increasing exposure expose was too dangerous given the Sacramento-based plan's 68% funding ratio, endangering the plan's viability in the event of an equity downturn.

Chief Investment Officer Theodore Eliopoulos said the plan adopted was a good balance.

While he said CalPERS would be taking away increased returns if equity bull markets continue, at the same it would be protecting assets in case of a downturn, though even at 50%, CalPERS still has heavy equity exposure.

Critics have pointed out that the new allocation is unrealistic because the pension fund's own estimate shows the portfolio that was adopted would have a 6.1% rate of return annualized over the next 10 years. If investment returns fall under 7% that would increase the system's $138 billion unfunded liability in the near term.

CalPERS officials justified the allocation because they say long term over the next 60 years, they estimate the system can make the annualized 7% rate of return.