A second California appeals court ruled Dec. 30 the state can reduce or eliminate pension benefits as long as employees still receive a pension that is “substantial” and “reasonable.” This ruling capped a tough 2016 for members of CalPERS, the largest public pension fund in the U.S. The $311 billion California Public Employees' Retirement System saw its funded status fall four percentage points to 69% and reduced its assumed investment rate of return to 7% from 7.5%. Given the fund's 10-year annualized return of 5.1%, however, even this return assumption might prove overly optimistic.
Evaluating what constitutes “substantial” and “reasonable” pension benefits remains a topic squarely in the public policy realm and outside the scope of this commentary. However, data describing pension plan expectations, performance and allocations might offer insights to market participants trying to tackle the hard problem of asset allocation.
The Public Plans Data produced by the Center for Retirement Research at Boston College contains detailed annual data from fiscal year 2001 to 2015 for CalPERS and other large U.S. state and local pension funds. An analysis of the data highlights two interesting findings. First, the average public pension plan reports a long-term return expectation of 7.6% as of 2015 (the last year available), a forecast that has declined approximately 40 basis points since 2001. Second, pension plans seem to expect to earn 10% per year from equities over the long term but little to no return from their fixed-income and alternative investments.