Calpers Should Cut Assumed Return to 7.25% From 7.75%, Actuary Recommends

The California Public Employees’ Retirement System, the largest U.S. public pension, may cut its assumed rate of return on assets for the first time since the global recession dragged down stock and real-estate prices.

Actuary Alan Milligan recommended trimming the annual return estimate yesterday to 7.25 percent from 7.75 percent, potentially driving up what the fund, known as Calpers, requires from taxpayers to provide benefits for more than 1.6 million employees, retirees and their families.

Public funds have come under fire for using investment assumptions that hide the true size of shortfalls. The $238.1 billion fund last adjusted its rate of return in 2004, to 7.75 percent from 8.25 percent. The plan is to be considered by the Calpers board next week.

Lowering the return would boost the state’s employee pension costs, as a percent of payroll, as much as 4.2 percent in the year beginning July 1, according to a Calpers staff report. Local governments could see an increase of as much as 4.5 percent the following year. The costs for some public-safety agencies could jump as much as 6.5 percent.

The pension fund estimates that it has about 75 percent of the money it needs to cover promised benefits. That differs from a Stanford University report that said Calpers was only 58 percent funded, based on a 6.2 percent annual return on assets.

Equities Drop

The fund earned 1.1 percent in the calendar year that ended Dec. 31 as global equities dropped, compared with a gain of 2.1 percent for the Standard & Poor’s 500 Index of U.S. shares including reinvested dividends.

Calpers earned almost 5.1 percent over a decade and 7.5 percent in the past 20 years, according to Joe Dear, the system’s investment chief.

The board rejected a similar proposal by Milligan last year. Board members at the time expressed concern that lowering the rate to 7.5 percent would burden local governments when they were already facing financial strains.

Milligan gave the board an option to cut the rate to that same level this year, saying the economy continues to put pressure on local governments.

The California State Teachers’ Retirement System, the second-largest U.S. public pension with $148.9 billion of assets, agreed Feb. 2 to lower its assumed returns to 7.5 percent from 7.75 percent, the second reduction since 2010.

The teacher’s fund had 71 percent of what it needs to pay future benefits as of June 2010. The lower rate added $5.9 billion to a $56 billion shortfall projected at the time, according to Milliman Inc., the fund’s consulting actuary.

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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