California Public Employee Pension Earns 1% on Investments

California Public Employee Pension Earns 1% on Investments
The California Public Employees' Retirement System (Calpers) in Sacramento. Photographer: Ken James/Bloomberg

The California Public Employees’ Retirement System earned 1 percent in the past fiscal year as slumping global stock prices dragged down the largest U.S. pension.

The fund lost 7.2 percent on shares, while private equity gained 5.4 percent. Calpers’ bonds rose about 13 percent and its real estate holdings climbed 16 percent. Calpers, as the fund is known, ended fiscal 2012 with $233 billion in assets, according to a statement today. Half of its holdings are in stocks.

The return for the 12 months through June 30 marks the third time in the past five years that it has failed to reach the 7.5 percent threshold needed to meet projected obligations. When Calpers underperforms, the state and its municipalities must make up make up the difference. The state will see its costs rise next year and local governments the following year, the fund said in statement.

“Inevitably, a 1 percent return will be noted by some as significantly below our target return of 7.5 percent and questions will be raised as to whether that 7.5 percent is realistic,” the fund’s chief investment officer, Joseph Dear, said in remarks to reporters. “One percent is below where we would like it to be but it is well within the range of returns for the kind of portfolio we have.”

21% Return

The fund earned almost 21 percent in fiscal 2011, its best result in 14 years. The 12 months prior to that, the fund returned almost 12 percent. It lost 23 percent in fiscal 2009, its worst one-year decline on record.

Calpers spreads out any gain or loss over 15 years to shelter municipalities from volatility in annual results. On that basis, it earned almost 5.9 percent in the most-recent period.

The California State Teachers Retirement System, the second largest U.S. public pension with $150.6 billion in assets, earned 1.8 percent in its fiscal year, the fund said July 13. It also assumes it will earn 7.5 percent.

California’s state pensions in 2010 had about 81 percent of what they needed to cover the benefits they promised, down from 87 percent in the preceding year, according to an annual study by Bloomberg Rankings. The median for all states was 75 percent, the data show.

Public funds such as Calpers and the teachers’ fund have come under fire for using investment assumptions that can mask the true size of shortfalls.

Assumed Rate

Calpers’s governing board in March lowered its assumed rate of return on invested assets from 7.75 percent. The rate is used to calculate how much money the plan will need to cover promised benefits and what employers must contribute.

While the fund’s actuary recommended lowering the rate to 7.25 percent, the Calpers board said at the time that would burden local governments when they were already coping with financial strains.

“It’s important to maintain a realistic outlook, and the long-term number for our fund shows that our 7.5 percent target is obtainable,” Dear said. “The key for all investors is having a strategy and sticking with it when it’s working and when it’s underperforming. The worst mistake you can make is abandoning your strategy when it appears to have some trouble.”

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