CalPERS lowers return expectations, hiking pension costs

Bowing to the realities of a volatile stock market and a weak investment climate, the board of the nation’s largest public pension fund lowered its benchmark assumed rate of return.

The board of the California Public Employees’ Retirement System voted 9-1 Wednesday to reduce its expected average annual return from 7.75% to 7.5%. That was a quarter of a percentage point higher than what had been recommended by its chief actuary, Alan Milligan.

The board also agreed to reduce its assumed average annual inflation rate from 3% to 2.75%.

The change, which kicks in for the state government and school districts on July 1, will cost the state $167 million in higher pension costs in the next budget year. School districts will get a $137 million higher bill for non-teaching staff retirements.

The financial effect on hundreds of county and city governments hasn’t been calculated. Those costs will increase on July 1, 2013.


The CalPERS board, wary of that impact, directed staff to consider ways to slow or otherwise mitigate a dramatic boost in local government pension costs.

The change in the assumed rate of return has created widespread concern among local government officials, who told the board that they already are laboring under falling revenues, tight budgets and, in extreme cases, the threat of bankruptcy.

“To implement this in one fell swoop would be detrimental to my organization,” said Chief Kurt Henke of the Sacramento Metropolitan Fire District. “You’ve got to give us some breathing room.”

The $240-billion CalPERS fund has used the 7.75% assumed rate of return for two decades and over that time has exceeded the benchmark on average. But recent losses, including a drop of nearly a quarter of the value of the portfolio during the recession of 2007-2009, has upset the historic performance predictability.


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