Business & Real Estate
By Dale Kasler
October 20, 2015
- Governor wants fund to cut risk more quickly
- CalPERS worries about squeezing member agencies
- Buffering market volatility at core of plan
CalPERS is about to implement a new investment policy that will reduce risks and future profitability. But the giant pension fund is being urged by Gov. Jerry Brown’s administration, and some of CalPERS’ own board members, to dial back those risks more quickly.
A schism over the CalPERS plan arose at a meeting Tuesday of the fund’s finance and administration committee. Committee member Bill Slaton, a Brown appointee, urged CalPERS to move more aggressively to reduce the fund’s “discount rate,” a target for investment profits. Other committee members, however, said they prefer the more gradual proposal that’s on the table.
Both sides agree that CalPERS should reduce the discount rate at a time of increasing market volatility. Other public pension funds have been lowering their discount rates in recent years in an effort to cushion themselves against wild swings in the market, and CalPERS argues that its plan will improve its long-term stability.
Hundreds of millions of taxpayer dollars are at stake as CalPERS deliberates its new investment strategy. A lower discount rate translates into a more conservative portfolio. That in turn will require the state and municipal agencies, which are already facing hefty contribution increases, to pump even more money into the California Public Employees’ Retirement System.
CalPERS’ discount rate is currently 7.5 percent. The fund earned just 2.4 percent in its latest fiscal year, well below the target, although CalPERS said its annual average return has been 11 percent over the past five years.
The risk-reduction mechanism, unveiled a week ago, is unusual if not unique. It would have the pension fund cut the rate every time its most recent annual returns exceed the discount rate by at least 4 percentage points. Under this plan, the discount rate is expected to drop to 6.5 percent in around 25 to 30 years.
Slaton and others, along with a representative of Brown’s Department of Finance, said CalPERS should lower the discount rate more quickly. Slaton said the cuts in the discount rate should begin when annual returns exceed the current rate by 2 percentage points, not 4 points.
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