CalPERS’ chief investment officer and its two key consultants told a board committee Tuesday that the pension fund’s 7.5% assumed rate of return is too high, setting in motion a potential board vote in February to lower the rate of return.
Such a move by the $299.5 billion California Public Employees’ Retirement System, Sacramento, would be a sharp reversal because pension fund officials had insisted in the past that the 7.5% rate of return was realistic.
Last year, the CalPERS board of administration established a 20-year plan to reduce the assumed rate of return by a minimum of 0.05 percentage points to a maximum of 0.25 percentage points in years when investment returns outperform the existing 7.5% rate of return.
Lackluster returns haven’t led to any reductions in the return rate yet; however, CalPERS officials and consultants said Tuesday new capital market forecasts show it is unlikely the retirement system would make the 7.5% return assumption over the next decade.
CalPERS board member Richard Costigan, who chairs the finance and administration committee, asked CalPERS consultants and staff members at Tuesday’s meeting to come up with a specific rate-of-return recommendation for the committee’s Dec. 20 meeting.
Mr. Costigan expects a February vote by his committee and the full board.
“What has really changed over the last 12 months is the world has changed,” Mr. Costigan said in an interview after the meeting. “I am not even talking about what happened last Tuesday,” looking beyond the election of Donald J. Trump and focusing on what Mr. Costigan said was a slow-moving economy for years to come.
Andrew Junkin, president of Wilshire Consulting, the pension’s fund’s general investment consultant, told the committee its firm estimates the pension fund’s annualized investment return over the next decade will be 6.2%, down 90 basis points from the 10-year forecast Wilshire made a year ago of 7.1%.
Allan Emkin, managing director and co-founder of Pension Consulting Alliance, the pension fund’s private equity and real estate consultant, agreed with the Wilshire assessment.
Messrs. Junkin and Emkin, and Theodore Eliopoulos, CalPERS’ CIO, said the low-interest-rate environment and the slowing of U.S. economic growth, the main driver of global growth, were all contributing to the diminished economic outlook.
Mr. Junkin said the election of Mr. Trump would increase market volatility but would not change the base economic forecast.
CalPERS was scheduled to determine its rate of return in February 2018 after a review of asset allocation, scheduled for 2017, was complete. But Mr. Costigan insisted Tuesday that the two “don’t have to move in tandem” and the rate of return could be determined without a new asset allocation in place.
Mr. Eliopoulos on Tuesday asked members of the finance and administration committee to move sooner rather than later so the pension fund could receive increased contributions.
CalPERS is 68% funded and a reduction in its rate of return would require municipal governments, school districts and local governments, whose employees are part of the pension fund, to make larger contributions.
The increased contributions would start in July 2017 if the board took action by April on lowering the rate of return.
Committee members were divided Tuesday over how soon they would act on a change in the rate of return. Mr. Costigan originally tried to gain support for a December vote on changing the return rate. Ultimately, his plan for staff recommendations in December, with a potential vote in February, was met with the support of most committee members.
CalPERS returned 0.6% in the fiscal year ended June 30 and 2.4% in the prior fiscal year.
For years, CalPERS critics have said the pension fund was using an overly optimistic rate of return. Those critics include California Gov. Edmund G. “Jerry” Brown Jr., who in 2015 called on retirement system officials to be more aggressive in decreasing its rate of return.
