Updated with correction
CalPERS’ finance and administration committee on Tuesday will discuss a plan that reduces the pension fund’s assumed rate of return only in good investment years.
The $296.2 billion California Public Employees’ Retirement System, Sacramento, has been considering a plan to reduce its 7.5% assumed rate of return as part of efforts to reduce volatility and risk in its overall portfolio.
The policy — which reduces the assumed rate of return by five basis points when CalPERS’ investment returns exceed its assumed rate of return by four percentage points in any given year — was developed from one of two proposals made earlier this year.
The other plan would have required reductions in the rate of return at set points once every four-year period if performance was not robust enough to merit a decrease in the return rate.
The proposal is expected to be voted on at the committee’s next meeting in November, and then go to the full board for a vote that month.
Under the plan, for each additional three-percentage-point increase in returns up to 13 points above the assumed rate of return, an additional reduction of five basis points is taken. A final increment of four percentage points to 17 points above the assumed return rate would lead to an additional reduction of five basis points.
The maximum reduction in the assumed rate of return allowed under the plan would be 25 basis points in a given year.
Under that most optimistic scenario, CalPERS would reduce the current 7.5% rate of return to 7% in two years.
CalPERS spokesman Joe DeAnda said there was general consensus among CalPERS board members and staff that the other plan that would have reduced the assumed rate of return periodically regardless of positive investment returns would have placed too much of a financial burden on municipalities, the state and school districts.
Even under the new plan, the three employer groups would have to make additional contributions to fund the less-risky portfolio.