Calpers could be a bit more realistic. California’s 300 million California government pensioner is considering cutting off its investment return assumption. The move would involve the budgets of public authorities and employees, but would provide funding for retirees. If the US government pension bellwether can do it, others will follow.
Public pension funds in the United States have long been based on unrealistic investment hypotheses, but the financial crisis and the poor performance of the market have exposed this game. Calpers made a small step in 2012 lowering its 0.25 percentage point yield to 7.5 percent, but the fund generated a return of only 0.61 percent in the twelve months ended June 30 . Annualized returns were 5.1 percent in the last 10 years.
Ted Eliopoulos, the chief investment officer, has reconsidered the fund’s portfolio since he took over two years ago, cutting the hedge fund allocation and assigning less, but larger, outsourced to executives. These moves are not enough to close the gap for a retirement system that has only 76 percent of the assets needed to secure the current pension benefits to its members.
The Calpers table next week will consider a plan to reduce recruitment to a minimum of 7 percent. Employer costs would have been gradual in over five years, with state and local government pension contributions rising by $ 2 billion a year over the fifth year. For employees, the shot could be another percentage or more point in salary deductions.
This is a red flag of the politics, and the increase in the postelection stock market might tempt some trustees of duck retirement. But Trump’s shot will not solve their problem. Stocks could easily give up recent gains, and higher interest rates could hit short-term bond yields. Wilshire, the consultant, predicts that a classic 60-40 wallet portfolio will return less than 6 percent per year.
Private sector defined benefit pension plans typically use the 4.25% return assumptions at the time, according to Milliman, another consulting company. The well-funded pension system in the Netherlands is even more demanding, earning less than 3.5 per cent a year.
If the Calpers bite the ball now, this will improve their position and send a useful signal. Many US public pensions have worse financing situations and even more optimistic assumptions. It’s been time to stop pretending.