A key CalPERS committee approved a plan Tuesday to reduce the pension fund's rate of return to 7% over a three-year period from the current 7.5%.
The recommendation came Tuesday at a meeting of the plan's finance and administration committee.
The plan is being fast-tracked and the full CalPERS board is expected to approve the plan on Wednesday.
The reduction in the rate of return is not as big as was discussed last month.
Chief Investment Officer Theodore Eliopoulos said at last month's finance and administration committee meeting that given diminished investment return assumptions over the next decade, 6% was a more realistic annualized investment return for the coming 10 years.
Andrew Junkin, president of Wilshire Consulting, which serves as CalPERS' general consultant, said at the November meeting that Wilshire was predicting an annual return of 6.21% for the next decade, down from its estimates of 7.1% a year earlier.
The smaller reduction approved Tuesday comes as representatives of California cities, towns, school districts and other governmental units that contribute to the nation's largest defined benefit plan argued that they could not afford the contributions that would be necessary under a more severe rate reduction plan.
State Controller Betty Yee, a member of the finance and administration committee, said at Tuesday's meeting that she can predict the headlines Wednesday: “There will be headlines tomorrow about how we were not aggressive enough,” Ms. Yee said of the 7% rate of return.
But Ms. Yee said the rate reduction will help stabilize the fund and the actions that occurred will be watched around the world. She said CalPERS' falling funding ratio is a symbol of a larger problem, the changing world economy.
The $303.6 billion Sacramento-based California Public Employees' Retirement System's current funding ratio is 68%. Two years of poor results — a 0.6% return for the fiscal year ended June 30 and a 2.4% return in fiscal 2015 — have contributed to a more negative view of what CalPERS can earn over the next decade.
Mr. Eliopoulos, in explaining how investment staff came up with the 7% rate of return, said it was based on not just the 10-year outlook but a 30-year forecast that shows better investment returns.
But Mr. Junkin said at the November meeting that CalPERS might not survive past 10 years if the rate of return was not lowered, but never gave a specific recommendation as to how much the rate of return should be reduced.
Under the three-year reduction, phased in to soften the blow on employers, the rate of return for the pension fund would be lowered to 7.375% for the fiscal year starting July 1, 2017; 7.25% for the fiscal year that begins on July, 1, 2018; and 7% for the fiscal year starting on July 1, 2019.
CalPERS is far from the only public pension plan lowering its rate of return assumptions. Statistics from the National Association of State Retirement Administrators show that 43 of 137 public plans have lowered their return assumption since June 30, 2014. But NASRA statistics show only nine plans out of 127 are below 7% and none has gone below 6.5%.
