SAN FRANCISCO, March 14 (Reuters) - The board of California’s pension fund for public employees voted on Wednesday to lower the fund’s assumed rate of return, a move that will increase contributions to the fund from government employers across the state who use its services.
The board of Calpers, the $235 billion California Public Employees’ Retirement System, approved lowering the rate to 7.5 percent from its longstanding rate of 7.75 percent a day after the fund’s pension and health benefits committee endorsed a reduction.
Calpers staff had recommended dropping the rate to 7.25 percent. But fund President Rob Feckner said that would be too burdensome for government employers that pay into the fund - including state agencies, school districts and local governments - at a time when their finances remain pressured by weak revenue.
Calpers, however, needs to update its so-called discount rate to take into consideration economic prospects that could limit the fund’s returns, Feckner said.
“We understand the impact this will have on our employers in meeting contribution requirements,” Feckner said. “However, current economic conditions impelled us to make this change now, and our actuaries will continue to evaluate the discount rate in the coming years.”
The decision in favor of a new rate coincides with the three-year anniversary of Joseph Dear arriving at Calpers to take the role of its chief investment officer, as well as the value of the fund’s assets sinking to a recession low of about $160 billion, down from a peak of about $260 billion in October 2007.
One of Dear’s top priorities has been to better position the pension system to navigate and withstand risks to its investment portfolio. It includes stocks, fixed-income, commodities, real estate, infrastructure, private equity, venture capital and hedge-fund investments.
A more resilient fund would be able to better meet its rate of return target while mitigating the potential for steep losses during economic and market downturns.
Critics of Calpers’ previous 7.75 percent annual return target said it was too optimistic to sustain over the long term.
Former state lawmaker Joe Nation, now at the Stanford Institute for Economic Policy Research, said in a report in December that if the next 30 years mirror roughly the last 30, Calpers would face even odds of earning a return of at least 7.1 percent per year.
The fund’s odds of a 7.75 percent return per year over the same period were lower, at 42.1 percent, Nation added.
“I congratulate the (Calpers) board in moving in the right direction but I wish it could be a larger step,” Nation said, adding that the pension fund’s discount rate should, at the most, be about 6.5 percent.
“Probably most economists here at SIEPR would argue with me that’s even overly optimistic,” Nation said.
Calpers has countered such criticism by pointing to its long-term results, noting that over a 20-year period through June 2011 it earned an average annual return of 8.4 percent and that the value of its portfolio is up substantially from its March 2009 low.
Local government officials lobbied Calpers not to drop its assumed rate of return as that would raise their pension costs at the same time they are looking to clamp down on spending, including on pensions, which are among the fastest-rising expenses for municipalities.
Stockton, California, which could file for Chapter 9 bankruptcy protection if a fiscal restructuring plan that includes defaulting on some debt payments and seeking concessions from major bondholders, employees and retirees doesn’t work out, expects an additional $730,000 cost from a lower Calpers discount rate, according to a city spokeswoman.
In a nod to concerns about ripple effects of a lower rate, Calpers’ board directed the fund’s chief actuary to plan for a potential 2-year period for phasing in increased pension costs to ease their financial burden.
Calpers projects the new rate will increase pension expenses in the state budget by $167 million in the next fiscal year. Schools districts, many of them mailing notices of potential layoffs to teachers and other employees ahead of a March 15 notification deadline, would see their pension expenses increase by $137 million.
Other government agencies with retirement plans managed by Calpers would see their contributions to the fund increase in the following fiscal year. (Reporting By Jim Christie; Editing by Dan Grebler)