CalPERS’ board on Wednesday is expected to vote on whether to lower the $233.4 billion retirement system’s assumed investment return to 7.5% from 7.75%.
The reduction was recommended Tuesday, by the pension and health benefits committee of the California Public Employees’ Retirement System, Sacramento.
Staff had asked the committee to lower the discount rate to 7.25%, which would equate to a real rate of return of 4.5%, according to agenda materials for Tuesday’s meeting.
During the meeting, Alan Milligan, CalPERS chief actuary, said that if the discount rate is lowered to 7.5%, CalPERS would have a 50% chance of achieving its return goal. It would have a 54% chance of achieving the mark if it reduced the discount rate to 7.25%.
He suggested revisiting the assumptions in two years, rather than waiting the typical four-year period.
Committee Vice Chairman George Diehr, who made the motion to lower the discount rate to 7.5%, noted that changing the discount rate was a “rock-and-a-hard-place decision,” because lowering the assumption increases employer contributions. What’s more, the staff report had noted that although staff was recommending the lower 7.25% discount rate, a smaller reduction of 7.5% might be preferred by the committee and the board “given that the state of the economy has put severe pressure on employers’ budgets.”
On Monday, the fund’s investment committee extended the contract of private equity consultant Pension Consulting Alliance through June 30, 2014. PCA’s current contract expires June 30 and includes the option to extend the contract for another two years.
The investment committee also voted unanimously to oppose state law SB955, which requires state pension plans to invest in state infrastructure projects unless doing so violates their fiduciary duty, because it would place an investment mandate on the board.
Danny Brown, chief of the retirement system’s governmental affairs office, noted that the board recently adopted an infrastructure strategic plan, of which $800 million is to be invested in California infrastructure.