CalPERS needs to earn 7.6% a year over the next 15 years to become fully funded but that might be just pie in the sky, one of the investment world's leading lights told the pension fund's board this week.
"You're not going to get a 7.6% return when the U.S. is seeing a subpar (economic) growth rate of 2(%) to 3%," said BlackRock Inc. Chairman and CEO Laurence Fink, adding, “You'll be lucky to get 6% on your portfolios, maybe 5%.”
Mr. Fink, along with James Coulter, one of the founders of private equity firm Texas Pacific Group, spoke to the board of administration of the California Public Employees' Retirement System, Sacramento, offering their views on the economy and how the $178.1 billion pension fund might navigate the still-choppy waters.
They spoke to the board during its biannual off-site meeting, where board members ponder big-picture issues.
CalPERS has projected that it will need an annual asset return of 7.6% for its pension fund to be fully funded in 2024, assuming a 6% contribution growth rate and a 4.64% liability growth rate. CalPERS' current return assumption is 7.75% over 30 years.
But Mr. Fink said he does not think that is possible, given the state of the economy.
To achieve that 7.6% return, CalPERS would need a much more global portfolio and might also have to increase its contributions, Mr. Fink said. Otherwise, the only recourse is to lower its return target, he said.
The somber words were not a complete surprise to the CalPERS board. The fund's CIO, Joseph Dear, had already acknowledged a tough road ahead.
“It's not realistic to expect our investment office to earn our way back,” he acknowledged at the meeting.
CalPERS recently reported a 23.4% decline in its portfolio's investment performance for the fiscal year ended June 30, the pension fund's greatest single-year decline in its 77-year history. Assets under management plunged to $180.9 billion from $237.1 billion a year earlier.