CalPERS' investment committee on Monday took a major step forward toward the possibility of lowering its expected rate of return to 7.25% from 7.5% when it approved lowering the return assumptions for the pension fund's fixed-income and inflation-linked asset classes.
The committee approved a staff recommendation calling for a 174-basis-point drop in fixed-income return expectations from 4.5% and a 305-basis-point drop for inflation-linked investments from the current 6%.
The board of the $259.8 billion California Public Employees' Retirement System, Sacramento, is expected to approve a new assumed rate of return by end of the year as part of a process that involves determining its asset allocation formula for 2014, 2015 and 2016.
Lowering the rate of return for the pension fund's $42.8 billion fixed-income portfolio, which makes up about 16% of CalPERS' portfolio, would almost certainly result in an overall decrease in the retirement system's rate of return.
The inflation-linked assets make up $9.8 billion of the total portfolio, or about 4%.
But CalPERS board members could offset the changing assumptions for fixed income by increasing allocations to other asset classes with more robust return projections, such as public equity, private equity or real estate, or decide to project returns over a 30- or 40-year period instead of the current 10 years, which would allow for more optimistic assumptions.
The investment committee approved the change after a debate by board members over whether interest rates would rise and change the fixed-income projections made by CalPERS staff.
Acting Chief Investment Officer Theodore Eliopoulos assured the investment committee that CalPERS staffers stood by their projections.
It was the first time Mr. Eliopoulos filled in for CalPERS CIO Joseph Dear, who is being treated for prostate cancer.
Only one investment committee member, J.J. Jelincic, voted against the return assumptions recommended by staff.