| SAN FRANCISCO
SAN FRANCISCO Feb 6 U.S. public pension funds
are cutting their expectations for investment returns over the
next 30 years or more, but some do not expect to meet even the
new targets over the coming decade.
After a long period of low interest rates, forecasts by
investment analysts show the next 10 years will probably bring
slower market growth, leading to reduced expectations for the
$3.7 trillion of public pension assets.
But public pensions are wary of lowering their expected
return rates, or the discount rate, too quickly because doing so
would drastically increase costs for state and local governments
and their employees, whose contributions form the funds.
Instead, the funds say they plan to make up for lower
returns expected in the coming decade over the next 30 years or
"Pension funds are in an extraordinarily difficult political
situation," said Don Boyd, fiscal studies director at
the Rockefeller Institute of Government.
If they protect their portfolios by moving assets into
safer, lower-return investments, he said, "they will have to
drastically increase the cost for local governments. They are
reluctant to do that."
The California Public Employees' Retirement System, the
largest U.S. public pension fund, anticipates annual returns of
6.2 percent over the next decade.
However, CalPERS still expects its long-term return to
align more closely with a discount rate that it plans to reduce
to 7 percent by 2020, because it anticipates returns will jump
to 7.83 percent in the decades to follow.
Such a forecast in the short term could spell declining fund
conditions, a rise in unfunded liabilities and increased costs
for government employers and workers.
CalPERS is not alone. The Ohio Public Employees Retirement
System expects an average 6.76 percent return over the next five
to seven years, short of its 7.5 percent discount rate. But the
fund anticipates returns will climb to 7.85 percent over a
Los Angeles Fire and Police Pensions expects compound
returns of 6.33 percent over the next decade, considerably below
its 7.5 percent discount rate. The fund believes the compound
return "will rise over the long-term as interest rates move back
up," said General Manager Ray Ciranna.
PAST IS PROLOGUE
Private-sector and public plans in Canada and Europe lowered
their discount rates over the past two decades. But U.S. public
pension funds maintained higher return expectations and put more
of their money in risky assets to help achieve them, according
to the Rockefeller Institute.
As a result, the potential impact of investment shortfalls,
relative to government tax revenue, is now more than three times
as large as it was in 1995, and about 10 times as large in 1985,
the Rockefeller Institute found.
CalPERS hopes to avoid another calamity like the one it
experienced during the 2008 recession, when its funding status
dropped to 61 percent from 100 percent.
Like the vast majority of U.S. public pensions, the $307
billion fund is now paying out more money to retirees than it is
collecting from current workers and employers.
"It's a challenging market to operate in," said CalPERS
Chief Investment Officer Ted Eliopoulos. "When you're in that
position, you need to be asymmetrically concerned about downside
risk as upside risk."
CalPERS has reduced volatile stocks and private equity from
its portfolio. It made more than $9.2 billion in net equity
sales in September and October, according to fund documents. In
December, the board reduced the discount rate to reflect the new
The new expectations still did not reflect investment
advisers' short-term forecasts. Wilshire estimated only a 17
percent probability that CalPERS would earn its new 7 percent
discount rate over the next decade.
At the time, CalPERS board member J.J. Jelincic proposed
reducing expectations further to align the discount rate more
closely with advisers' forecasts. "6.25 is the reality,"
Jelincic said at a December meeting.
But the board worried that the costs of such a move would
require even higher contributions from California governments
Cities are already warning of the impending strain.
Scotts Valley, a small city outside of Santa Cruz, expects
its annual pension costs to jump by nearly 75 percent over three
years under CalPERS' new discount rate. By 2021, the city's
annual pension contributions will reach $2.8 million, about 16.3
percent of the city's total budget, up from $1.5 million, or 9.6
"Even though I personally would like to see a lower
assumption," CalPERS board member Dana Hollinger said in
December, "I realize it would be too much of a strain on
(Reporting by Robin Respaut; Editing by Daniel Bases and Lisa