CalPERS staffers are recommending that the pension fund lower its expected future rate of return for its fixed-income and inflation-linked asset classes, setting the stage for a wider debate over whether CalPERS will need to reduce its overall assumed 7.5% rate of return.
Staff members are calling for a 174-basis-point drop in fixed-income return expectations and a 305-basis-point drop for inflation-linked investments.
CalPERS sources said the investment committee is likely to approve the new rates of returns for specific asset classes, but is divided over whether that means it would have to lower the overall assumed rate of return. Instead, it could increase allocations in assets classes like global equities, real estate and private equity to make up for the lower returns in fixed income and the inflation-linked asset classes.
Another option, sources said, would be for the board to project returns over a 30- or 40-year period instead of the current 10 years, which would allow more optimistic returns assumptions.
Either option could allow the $264.9 billion California Public Employees' Retirement System, Sacramento, to keep its current rate of return. The last time CalPERS reduced its capital market assumptions was in 2010, but the pension fund did not reduce its rate of return 25 basis points from 7.75% until early 2012. CalPERS staffers had recommended the rate be dropped to 7.25%, but the CalPERS board decided that would have been too much of a burden on the state and municipalities in terms of increased contributions.
