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WSJ: Calpers May Slash Its 7.5 Percent Investment Target

WSJ: Calpers May Slash Its 7.5 Percent Investment Target

(Getty/Max Whittaker)

By    |   Thursday, 15 December 2016 10:52 AM

The California Public Employees’ Retirement System, the largest U.S. public pension fund, reportedly seeks to slash its investment targets for the first time since 2012, which could spark a ripple effect across the nation.

Key Calpers officials plan to propose next Tuesday that their board abandon a long-held goal of 7.5% annually, system spokesman Brad Pacheco told The Wall Street Journal. Reductions to 7.25% and 7% have been studied, the Journal reported.

Such a move “would trigger more pain for cash-strapped cities across California and set an increasingly cautious tone for those who manage retirement assets around the country,” the Journal explained.

Calpers last cut its investment expectation was in 2012, when the rate was dropped to 7.5% from 7.75%. Calpers also in late 2015 agreed to scale back its target by as much as a quarter percentage point annually—and only in years of positive investment performance.

But Calpers officials fear that’s not fast enough because of a mounting cash crunch and declining estimates of future earnings.

“There’s no doubt Calpers needs to start aligning its rate of return expectations with reality,” California Gov. Jerry Brown said in a statement provided to the Journal.

“The accounting maneuver would have real-life consequences for taxpayers and cities. It would likely trigger a painful increase in yearly pension bills for the towns, counties and school districts that participate in California’s state pension plan. Any loss in expected investment earnings must be made up with significantly higher annual contributions from public employers as well as the state,” the Journal said.

“A drop in Calpers’ rate of return assumptions could also put pressure on other funds to be more aggressive about their reductions and concede that investment gains alone won’t be enough to fund hundreds of billions in liabilities,” WSJ.com reported.

Because of its size, Calpers typically acts as a bellwether for the rest of the pension world. It manages nearly $300 billion in assets for 1.8 million members.

In September, Calpers Chief Investment Officer Ted Eliopoulos warned of a widening funding gap for the foreseeable future as returns lag behind obligations to retirees.

“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,” Bloomberg reported.

Calpers 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 in September 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.

(Newsmax wire services and Bloomberg contributed to this report).

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The largest U.S. pension fund reportedly seeks to slash its investment targets for the first time since 2012, which could spark a ripple effect across the nation.
calpers, investment, target, wall street journal
Thursday, 15 December 2016 10:52 AM
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