CalPERS' board on March 14 voted to reduce the retirement system's assumed investment return to 7.5% from 7.75%, effective July 1.
The board of the $233.4 billion California Public Employees' Retirement System directed staff to come back within the next few months to phase in increased payments for employers, said Wayne Davis, spokesman for the Sacramento-based plan. No timetable was set, he said.
The recommendation was approved by a voice vote of the board, so it was not known how each board member actually voted, Mr. Davis confirmed.
The discount rate cut was recommended March 13 by the retirement system's pension and health benefits committee.
CalPERS board member J.J. Jelincic, also a committee member, said at the March 13 committee meeting that he would vote against the proposal, which also lowered the price inflation rate assumption to 2.75% from 3%. He explained that with governments around the world flooding money into their economies, “I'm not sure that it is reasonable to expect that the low-inflation environment will continue.”
The reduction to 7.5% was recommended by the board's pension and health benefits committee of the California Public Employees' Retirement System, Sacramento.
CalPERS 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 the panel's March 13 meeting.
During the March 13 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.”
In other action, on March 12 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.
