Calpers CIO Says Funding Gap to Widen for Foreseeable Future

  • Pension’s net outflows to grow to $9.2 billion in 15 years
  • Returns lower than 7.5% projection would widen imbalance

The California Public Employees’ Retirement System, the largest U.S. public pension fund, faces a widening funding gap for the foreseeable future as its returns lag behind obligations to retirees, Chief Investment Officer Ted Eliopoulos said Monday.

“The gap grows over time,” Eliopoulos said during a presentation to the Calpers board. “If we return less than 7.5 percent along this path, it gets wider and sooner.”

Calpers, with $301.5 billion in assets, has reported net outflows for five of the past seven fiscal years, including $1.5 billion in the year ending June 30, according to a presentation by Eliopoulos. The gap, a measure of outlays for benefits compared with revenue from contributions and income, is expected to widen to $9.2 billion by fiscal 2031-2032, the final year in the presentation.

The projections are based on annualized returns of 7.5 percent, a target Eliopoulos said is overly optimistic given the current low-interest-rate, low-return environment.

Calpers’ consultant Wilshire Associates projects annualized returns closer to 6 percent, which would require higher contributions to the fund from a combination of public employees and taxpayers. The system also faces a wave of retiring baby boomers with lengthening life expectancy as the number of employees paying into the system has plateaued or fallen, he said.

Selling Assets

Calpers must sell as much as $2 billion of securities a year to help close the gap, Eliopoulos said, a situation likely to raise the risk of not meeting benefit needs if markets decline. As of June 30, Calpers had 68 percent of the money it needs to pay projected health and retiree benefits.

“A significant drawdown would particularly be painful especially when the current funded status of the fund is at just below 70 percent,” Eliopoulos said. “It’s very difficult in a down market to sell assets to meet these benefits.”

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