CalPERS' investment committee approved a new risk-based asset allocation for the $220.3 billion system with an assumed 7.38% rate of return, net of fees, down from the current 7.75%.
Also at its Dec. 13 meeting, the board of the California Public Employees' Retirement System, Sacramento, received recommendations on the fund's dealing with placement agents.
The rate-of-return calculations approved Dec. 13 are still subject to change because CalPERS' actuary must review the calculations by the board. A final decision is expected in February or March.
A lower rate would require increased contributions by local government agencies to CalPERS, 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.
CalPERS sources said it's likely the final assumed 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 he expects the system to be more nimble in the future in setting the assumed rate of return, which could be changed sooner than three years if conditions warrant.
Mr. Dear said at the meeting that the lower rate 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:
• growth — public and private equity — 63%;
• income — Treasury inflation-protected securities and other fixed-income securities — 16%;
• real — real estate, infrastructure and forestland — 13%;
• liquidity — which includes cash and government bonds like Treasuries — 4%; and
• inflation — commodities and inflation-linked bonds — 4%.
CalPERS had classified its 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.
Also at the meeting the board heard preliminary recommendations that would have the fund pay fees to external money managers based only on performance, rather than management or other fees, and would bar system's staff or board members from working for placement agents or money managers for two years after leaving the system.
The recommendations of the law firm Steptoe & Johnson LLP would affect the system's relationships with placement agents and how private equity deals are conducted.
Among other recommendations, CalPERS should implement a “placement agent resolution program” to allow those managers that paid placement agents to resolve outstanding issues with the retirement system. “In certain cases, CalPERS may need to end existing business relationships,” according to a report from the law firm.
The report says money managers with outstanding placement agent issues that decline to cooperate with CalPERS should be banned from participating in new investment relationships with the system.
For staff or board members who leave the system, the two-year ban would extend to any money manager or placement agent that had a contract with CalPERS that exceeded $10 million in value in the five years before the staff member or board member's departure. Existing California law does not prohibit staff or board members from going to work for external managers, placement agents or other financial services companies immediately upon leaving CalPERS as long as they had not represented those firms before CalPERS.
Also, fees would be documented in a transparent and straightforward manner at the time an investment is first proposed.
CalPERS' staff members also would be prohibited from attending meetings between officials of the private equity partnership in which they invest that are held at opulent resorts.
“Lavish meetings are inconsistent with the mission of CalPERS to prudently invest in manager trust funds,” according to the report. The report says CalPERS should encourage its external managers to hold all of these meetings, including annual and advisory board meetings, at the offices of one of the limited partners, including its own in Sacramento, or at the general partner's office.
Rob Feckner, CalPERS board chairman, said he endorses the concepts in general.
Philip Khinda, a lawyer with Steptoe & Johnson, said a full report on the law firm's findings is expected in early 2011. Some of these changes will require legislative approval.
The law firm's report stems from bribery allegations against placement agent Alfred Villalobos and former CalPERS CEO Fred Buenrostro.
Bloomberg contributed to this story.