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CalSTRS to cut assumed rate of return to 7%

CalSTRS on Wednesday approved lowering the pension fund's assumed rate of return to 7% from 7.5% over the next two years because of diminished capital market and inflation forecasts.

Milliman, the board's actuarial consultant, last month had recommended a reduction to 7.25%, but also offered the board the option of a 7% rate of return.

The plan approved by the board of the $196.4 billion California State Teachers' Retirement System would lower the rate of return to 7.25% as of July 1, and 7% as of July 1, 2018.

The vote for the more aggressive reduction came at a meeting in San Diego after a report from one of CalSTRS' investment consultants, Pension Consulting Alliance, that the pension fund had a less than 50% chance of meeting the 7.25% rate of return long term.

“It's responsible,” said board member Harry M. Keiley of the move to 7%. Mr. Keiley said it was necessary to ensure the long-term financial stability of the retirement system.

The vote also changes CalSTRS' long-term inflation assumption to 2.75% from 3%. A Milliman report had noted that over the past 20 years, “actual price inflation has been lower and is expected to remain below 3% in the future.”

Public pension plans across the U.S. have been lowering their assumed rates of return in light of less-than-rosy future capital market assumptions.

In December, the $306.6 billion California Public Employees' Retirement System, Sacramento, approved lowering its rate to 7% from 7.5% in stages over the next three fiscal years beginning in July.

Lowering the rate of return sets CalSTRS on a course for a funding level dip to 64% from today's 68.5%, with the adoption of the fund's actuarial valuation in April.

The West Sacramento-based pension system, the second largest in the U.S. by assets, had a 1.4% net return for the fiscal year ended June 30.