CalPERS’ investment committee approved a new risk-based asset allocation for the $215 billion system with an assumed 7.38% rate of return, net of fees, down from the current 7.75%.
A lower rate would require increased contributions by local government agencies to the California Public Employees’ Retirement System, Sacramento, which is likely to be politically unpopular in financially strapped California. CalPERS, however, can impose contribution rates directly on the government agencies; it does not need the approval of the state legislature or the governor.
The rate-of-return calculations approved Monday are still subject to change because CalPERS’ actuary must review the calculations by the board. A final decision is expected by CalPERS at its February or March board meeting.
CalPERS sources said it’s likely the final rate of return will be set at 7.5%. The rate would be set for three years beginning on July 1, 2011, but Joseph Dear, CalPERS chief investment officer, has said that he expects the system to be more nimble in the future in setting the assumed rate of return and that the rate-of-return assumptions could change sooner than three years if conditions warrant.
Mr. Dear said Monday the lower rate of return is the result of a less robust economic outlook that anticipates lower returns from fixed-income securities.
The system’s new asset allocation puts assets into five new classifications, according to a news release from CalPERS:
• liquidity — which includes cash and government bonds like Treasuries — 4%;
• growth — public and private equity — 63%;
• income — TIPS and other fixed-income securities — 16%;
• real — real estate, infrastructure and forestland — 13%; and
• inflation — commodities and inflation-linked bonds — 4%.
CalPERS had classified their assets as global equities, including hedge funds; global fixed income; and alternative investments, which included private equity, real estate and inflation-linked assets.
As part of the plan, CalPERS is investing in a BarraOne, a web-based risk management system that identifies fundamental market characteristics that drive volatility. “You can’t get solid returns without taking risk, but we want to make sure we know what that risk is and that we’ll be paid to take it,” Mr. Dear said.
CalPERS’ investments lost 23.4% in fiscal 2009, the biggest annual investment loss in the system’s history. In fiscal 2010, ended June 30, the system’s investments earned 13.3%.