CalPERS should consider changing its assumed rate of investment return from the current 7.75%, its actuary said Tuesday.
“It could have a very significant impact on employer contribution rates,” actuary Alan Milligan told the board of the $229.6 billion California Public Employees’ Retirement System, Sacramento. He said he would make more specific recommendations to the panel in March.
CalPERS last year rejected Mr. Milligan’s proposal to reduce the assumed rate of return to 7.5%. Board members at the time expressed concern that the lower figure would burden local governments when they already were facing financial strains.
The pension fund estimates it has about 75% of the money it needs to cover promised benefits. That differs from a Stanford University report that said CalPERS was only 58% funded, based on a 6.2% annual return on assets.
The $144.8 billion California State Teachers’ Retirement System, West Sacramento, agreed Feb. 2 to lower its assumed rate of return to 7.5% from 7.75%, the fund’s second reduction since 2010.
CalSTRS said it was 71% funded as of June 30, 2010.
The lower assumed rate added $5.9 billion to a $56 billion shortfall projected at the time, according to Milliman, the fund’s consulting actuary.
At CalPERS, volatility in the public markets has caused wider than expected variations in the fund’s annual returns. In the fiscal year ended June 30, CalPERS earned 20.7%, its best result in 14 years, led by stocks and private equity. Since then, the fund has dropped 4.5%. It lost almost a quarter of its value in 2009 as the global recession dragged down stock prices and real estate values.
The fund earned 1.1% in 2011 as global stocks, which make up about half of its assets, dropped about 8% in the period. The S&P 500 had a total return of 2.1% last year.
Separately, on Monday, CalPERS’ investment committee approved dropping its investment policy subcommittee, which reviews all investment policies for the retirement system, according to Brad Pacheco, system spokesman.
“The review of policies by two committees is redundant and time consuming” because the investment committee and the subcommittee are reviewing the same policy issues, according to an agenda item for the meeting.
The ad hoc subcommittee has six board members and was formed in 1995 to develop investment policies for the retirement system.
Reporter Randy Diamond contributed to this story.