CalSTRS — and other plan sponsors and institutional investors — will have a hard time meeting their return assumptions over the next 10 years, trustees of the $188.3 billion pension fund were told Thursday.
Pension Consulting Alliance, an investment consultant for the West Sacramento-based California State Teachers' Retirement System, presented CalSTRS board members with capital market assumptions from eight investment consultants and five money managers at a retreat meeting in Newport Beach, Calif.
Board members at the meeting wrestled with the issue of whether their investments will meet the pension fund's 7.5% annual return goal.
PCA's presentation said that consensus assumptions among the 13 firms “would likely lead to expected compound long-term returns of 7% or less for a typical institutional portfolio over a 10-year period.”
While many pension systems, including CalSTRS, have lowered return expectations, they still are anticipating returns of 7.5% or higher.
The issue is particularly sensitive for CalSTRS, the nation's second-largest defined benefit plan.
California Gov. Edmund G. “Jerry” Brown Jr. this summer signed a plan to fully fund CalSTRS within 32 years by increasing the amount school districts, teachers and the state contribute to the pension fund.
But that plan is based on CalSTRS achieving, on average, its 7.5% assumed return.
In an interview, CalSTRS Chief Investment Officer Christopher Ailman said there is only a 50% chance the pension fund could make the return assumptions over the long term.
Mr. Ailman said the board will begin looking at return assumptions for the next several years at its meeting next month to see what can be done to achieve the best results.
“We are going to assume the glass is half-empty,” Mr. Ailman said.
CalSTRS was 67% funded as of June 30, 2013, the latest data available.