CalPERS Adopts Discount Rate Changes

CalPERS announced a more conservative approach to its future discount rates on Wednesday in a bid to lower risk and close the pension fund’s funding gap.

The fund’s board approved a measure that will decrease its assumed rate of return following years where investment gains significantly outpace assumptions.

More from Reuters:

Calpers will reduce its expected rate of investment returns in years after the fund outperforms its 7.5 percent target by 4 percentage points. The goal is to ultimately reduce the rate to 6.5 percent, although that could take decades under the new policy.

Rob Feckner, president of the Calpers board of administration, said the policy “makes significant strides in lowering risk and volatility in the system, and helps lessen the impacts of another financial downturn.”

[…]

Jeff Snyder, a New York-based consultant at Cammack Retirement Group, said there is a national trend by pensions funds to remove risk from investment portfolios by ridding themselves of private equity and hedge fund holdings that could come at a cost to funds if the market surges.

“By reducing to lower risk, you protect the portfolio from downside but you’re also going to prevent upside potential,” he said.

In July, CalPers announced that after years of steady returns it missed the 7.5 percent target, returning just 2.4 percent for the fiscal year ended June 30.

Calpers is expected to have a negative cash flow – meaning it will be paying out more in benefits than it receives in contributions – for at least the next 15 years, mostly due to a maturing workforce.

Jerry Brown said Wednesday that he didn’t think the changes went far enough.

“I am deeply disappointed that the CalPERS Board reversed course and adopted an irresponsible plan that will only keep the system dependent on unrealistic investment returns,” Brown said in his statement.

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