CalPERS adopted two asset allocations for a new trust fund established by the state to help California public employers that offer a defined benefit pension plan to pre-fund pension contributions.
The trust fund, established Jan. 1, was created in response to anticipated rising pension costs over the next several years, Christine Reese, a CalPERS investment director, told the investment committee Monday. Employers have the opportunity to pre-fund pension contributions by investing in the trust, an Internal Revenue Code Section 115 trust that is tax-exempt. The contributions and the investment earnings on those contributions can only be withdrawn to pay pension contributions or to be invested in another trust with the same purpose, Ms. Reese said.
"Cash flows for the trust will be unpredictable as they're voluntary," she said, adding that cash flows will also vary in size and timing.
What's more, after discussing the new investment trust with public employers, staff learned that the time horizon is short-to-medium term and the risk tolerance is low to moderate, she said.
Asset growth in the first year could range from $100 million up to a few billion dollars, depending on whether California participates in the next fiscal year, a report to the investment committee said. "At this time ... we don't have an indication that (the state of California will) participate soon but potentially in 2019, later in the year," Ms. Reese said.
"Based on that feedback and with the difficulty of meeting those goals with one option, we determined it would be best to offer two options for employers to have a choice," she said.
The $365.1 billion California Public Employees' Retirement System, Sacramento, approved the two asset allocations recommended by staff. One target asset allocation, CEPPT Strategy 1, is a more moderate portfolio. It consists of 47% fixed income, 40% global equity, 8% real estate investment trusts and 5%, treasury inflation-protected securities. The Strategy 2 asset allocation is more conservative, with 73% fixed income, 14% global equity, 8% REITS and 5% TIPS.
CalPERS staff will implement the two asset allocation strategies.