Calpers Says 7.75% Investment Return May Be Tough to Meet

The California Public Employees’ Retirement System will be hard-pressed to return 7.75 percent this year as Europe’s debt crisis and the weak U.S. recovery continue to weigh on global stocks, its investment chief said.

“That’s going to be tough this year and maybe for the next few years,” Calpers Chief Investment Officer Joe Dear said in a Bloomberg Television interview today. “This low-return environment is structurally driven, and there’s not a lot of policy to move it.”

Calpers, the largest U.S. public pension fund, assumes it will earn an average of 7.75 percent annually to meet its obligations. It spreads out losses and gains over 15 years to blunt the impact that annual swings may have on the amount of money the fund charges taxpayers to finance retirement benefits for government workers.

The fund earned 20.7 percent in the 12 months ended June 30, its best result in 14 years, led by gains in stocks and private equity. Since then, Calpers’s value has dropped by $20 billion to $218.6 billion as of Sept. 26, as global stocks declined 17 percent.

Even with gains in fiscal 2011, the pension fund has earned 3.41 percent annually on average in the past five years, 5.36 percent in the last 10 and 6.97 percent in the last 15. It has only beat its assumed rate of return with a 20-year average of 8.38 percent annually.

Nationwide, the median state pension fund will achieve an annual return of 6.5 percent in the next 15 years, according to a February study by Wilshire Associates, the Santa Monica, California, investment adviser.

‘Not So Encouraged’

“The question is over the long term,” Dear said. “If you look back 20 years, has Calpers been able to make 7.75 percent? The answer is yes, well above, at 8.4 percent. So if you are long-term optimistic and you make the right moves, you can make that target, but I’m not so encouraged in the immediate term.”

The fund’s governing board in March decided against a recommendation by its actuaries to reduce its assumed rate of return on the expectation that markets would trail the historical average. The fund lost almost a quarter of its value in 2009 as the global recession dragged down stock prices and real-estate values.

“Once you look at a significant length of time, the cycles smooth out and a portfolio with a patient, disciplined approach will produce a return that matches our expectation of 7.75 percent,” Dear said in a telephone interview.

70 Percent Funded

Calpers in January said it had only about 70 percent of the money it needs to cover benefits promised to government workers when they retire. The pension was fully funded when the recession began in December 2007.

Dear said the fund will look beyond stocks to its other asset classes, such as private equity, hedge funds and infrastructure, to help boost returns.

Calpers has about 14 percent, or $33.6 billion as of June 30, invested in private equity, which returned 25.3 percent through the end of that month.

“We are in a low-return environment with a lot of downside risk right now,” Dear said. “You need to be realistic about the prospects and you need to ask what are the alternatives that might produce a better return than a classic stock-bond portfolio.”

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