California Pension Fund Shifts Money From Corporates to Inflation Bonds

The California Public Employees Retirement System, the largest public pension plan in the U.S., will reduce its holdings in corporate bonds by 4.1 percentage points, moving the money into cash, inflation-linked bonds and infrastructure.

The fund’s governing board today agreed to invest 15.9 percent in bonds, down from its 20 percent target. To reach that goal, Calpers would have to sell about $14.6 billion of the fixed-income holdings it reported as of Oct. 31. The board will increase investments in U.S. Treasuries and cash to 4 percent from 2 percent.

The $218 billion fund earned 13.3 percent on its holdings in fiscal 2010, following a loss of 23.4 percent in 2009, the biggest annual drop in the pension’s 78-year history. The loss, coming as the economic crisis felled Lehman Brothers Holdings Inc. and pushed global stock markets down 31 percent, prompted Calpers to seek more from taxpayers to cover retiree benefits.

“We are signaling the direction of the fund we’d like to take,” Chief Investment Officer Joe Dear said today.

The board agreed to keep its private-equity holdings at about 14 percent of assets and real estate at 10 percent. It will increase to 3 percent from 1 percent the amount it invests in inflation-linked bonds. Calpers will continue to put about 49 percent in public stocks.

The asset allocation shift assumes the fund will earn 7.38 percent, the same it estimated before today’s change.

Changes Every 3 Years

The board last changed its asset allocation in June 2009 in response to the recession. Calpers usually makes such changes every three years.

The fund’s 13-member administration board will decide as early as February whether to lower its assumed minimum annual rate of return on assets, currently at 7.75 percent. If the rate is cut, the plan will seek larger contributions from taxpayers to cover pension costs unless benefits are curtailed. The plan serves about 1.6 million current and retired government workers.

The fund held $225 billion the day before Lehman collapsed in September 2008, triggering a slide in equity markets.

To contact the reporter on this story: Michael B. Marois in Sacramento at mmarois@bloomberg.net.

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net.

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