By Ed Mendel
September 22, 2014

Three years ago CalPERS investment earnings hit bottom in a Wilshire consultants report that ranks the performance of big pension funds — dead last among its peers over the previous five years.

Last week a new Wilshire report showed CalPERS investment earnings steadily climbing up the ranks, finishing in the top quarter of big pension funds during the last three years.

In the report that ranks 49 public pension funds with portfolios of $10 billion or more, not only were CalPERS investment earnings in the top quarter during the last three years, but risk (as measured by volatility) was in the bottom quarter.

“That’s a great combination,” Andrew Junkin of Wilshire told the CalPERS board. “I can’t promise that it will be that way forever going forward. That’s certainly the Goldilocks outcome. But it’s a good place to be, and we should recognize it and enjoy it.”

The nation’s largest public pension fund is slowly recovering from giant losses during the recession. The portfolio peaked at $260 billion in the fall of 2007, plunged to about $160 billion in March 2009, and had climbed to $299 billion last week.

But CalPERS is still underfunded. It has about 76 percent of the projected assets needed to pay promised pensions. And that assumes investments will earn 7.5 percent a year, which critics say is too optimistic, though down from 8 percent last decade.

With a change in actuarial method, CalPERS is no longer keeping employer contribution rates low by spreading investment gains and losses over 15 years and refinancing debt each year.

The goal now is to get to full funding in 30 years. A series of rate increases, one expecting longer lives, will have boosted annual employer contributions to CalPERS roughly 50 percent when phased in over the next few years.

And after the huge losses, there is a new focus on risk. In a routine three-year adjustment of investment sectors last February, the CalPERS board looked at three options expected to yield 7.5 percent, and chose the one with the lowest risk of losses.

Still, CalPERS remains at the mercy of the markets. Investments are expected to provide about two-thirds of the money for pensions. To hit the earnings target, the portfolio leans toward stocks and other higher-yielding but riskier investments.

“If economic growth is generally favorable, the portfolio will likely perform well over time; if economic growth falters, the portfolio may underperform expectations, possibly by a material amount,” Allan Emkin of Pension Consulting Alliance told the CalPERS board in an opinion letter last February.
CalPERS adopted the “Portfolio A” three-year investment plan

CalPERS adopted the “Portfolio A” three-year investment plan

How the California Public Employees Retirement System is viewed as an industry leader and trendsetter, if not a mover of markets, was on display last week. CalPERS announced the end of its hedge fund program, a $4 billion shift over the next year.

Hedge funds were not part of the three-year plan for allocating investments adopted in February. CalPERS wanted a longer look at the funds that charge very high fees, while recently producing low yields and little loss protection during the downturn.

“Hedge funds are certainly a viable strategy for some, but at the end of the day, when judged against their complexity, cost, and the lack of ability to scale at CalPERS’ size, the ARS (hedge) program is no longer warranted,” Ted Eliopoulos, the new CalPERS chief investment officer, said in a news release last week.

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