CalPERS Aims to Lower Investment Risks, May Prompt Contribution IncreasesCategories: California Developments
The Sacramento Bee by Dale Kasler, October 12, 2015
CalPERS is about to roll out an unusual new investment policy that could reduce risks but also lower its portfolio’s profitability.
The new policy, to be discussed next week by members of CalPERS’ governing board, could prove controversial. Reducing profits could prompt the California Public Employees’ Retirement System to once again impose higher contribution rates on the state and on local governments.
CalPERS staff, in a report released Monday, said the new plan is designed to shore up the pension fund’s long-term financial stability even if it sacrifices some short-term profits.
The CalPERS board is considering the new “funding risk mitigation policy” at the same time CalSTRS, the teachers’ pension plan, is undergoing its own long-term analysis of how to reduce risk and volatility.
The proposed strategy at CalPERS, which controls $294.9 billion in assets and is one of the world’s most influential pension funds, caps more than a year of internal discussion on how to deal with increasingly volatile financial markets. It revolves around the CalPERS “discount rate,” the pension fund’s official forecast of annual investment returns, and is based on the idea that a year of very strong investment performance can often be followed by a difficult year.
Under the policy, CalPERS would reduce its discount rate, currently at 7.5 percent, when its most recent annual investment returns exceed the discount rate by a certain percentage. For instance, the rate would drop by 0.05 percent if CalPERS racks up investment profits that exceed the current rate by 4 percentage points. Stronger years would trigger bigger declines in the discount rate.
The pension fund would then adjust its portfolio accordingly, pushing more dollars into safer investments, which would be expected to generate lower returns. The staff report doesn’t outline which investments would be emphasized under the new plan.