CalPERS officials want to lower the pension fund's volatility by reducing the system's 7.5% assumed rate of return over time.
To do this, they would cut the fund's allocation to riskier investments such as stocks and increase bonds and other less volatile asset classes in a move that officials acknowledge would constrain returns in up markets but reduce losses in down markets.
The board of the nation's largest defined benefit plan is scheduled to discuss two staff proposals at its Aug. 18 meeting — both of which would lower the assumed rate of return of the California Public Employees' Retirement System's $302.2 billion investment portfolio over the next 20 to 30 years. Board members could act on the proposals at their October meeting, according to CalPERS documents.
“The returns will be slightly less during the good years, but they also won't be as bad during the bad return years,” said CalPERS' Chief Financial Officer Cheryl Eason in an interview.
The system's staff projects the current CalPERS rate of return could drop by as much as a full percentage point to 6.5% over the 20 to 30 years, according to a May presentation to its board. The actual reduction the board might approve to the return rate could change as discussions continue, said board member Henry Jones, who chairs the system's investment committee.
The financial crisis — which saw CalPERS lose about 25% of assets — has taught the retirement system the need for risk mitigation and a less volatile portfolio, Mr. Jones said in an interview.
“It is essential that we do this,” said California Controller Betty T. Yee in an interview with P&I. Ms. Yee added that if CalPERS does not reduce volatility, it could jeopardize its ability to pay retirees in the future.
CalPERS officials say either plan could be put in place in time for the fiscal year that begins July 1, 2016. Scenarios under the proposals project reductions in the assumed rate of return when returns exceed the 7.5% current assumed rate of return or after every four-year period if returns don't meet expectations.