C&B Notes

Calpers To Cut Target Return

We explored pensions a few months ago, but for the   first time in nine years Calpers (the nation’s largest pension fund) is set to reduce its assumed rate of return to 7.50% (from 7.75%).  Pension accounting is a huge mess, but some wounds are self-inflicted.  We frequently see large, labor-intensive companies use wildly unrealistic assumptions for both growth in pension assets and medical costs for retirees.  While the Fed’s low interest rate policy increases actuarial liabilities due to discount rates being derived from market rates, the larger problem is assumed rates of return by both companies and government entities.  With 30-year Treasury Bonds currently yielding only 3.4% and pensions being heavily invested in bonds, Calpers’ assumed rate of return seems to imply that either the plan is going to invest a huge percentage of its assets in very low credit quality fixed income assets or that the assumed return on equity allocation is well into the double digits.  We always use our own, conservative assumptions for companies when we evaluate their real obligations to their employees.

“This is a true rock-in-a-hard-place situation,” said George Diehr, a Calpers vice president who voted in favor of Tuesday’s move.  “We recognize the difficulty of raising contribution rates at a time budgets are strained.…But continuing to assume something that is not realistic is kicking the can down the road.”

Across the U.S., many public pension funds have been criticized for clinging to investment assumptions that might be unrealistically high given the recent low-interest-rate environment…


Calpers, formally the California Public Employees’ Retirement System, had a 1.1% return in the year ended Dec. 31. The fund’s annual return was 8.3% for the latest three-year period and 5.1% during the past decade. The pension system’s chief actuary supported Tuesday’s move by the eight-person committee, saying the pension fund’s current assumption on inflation is too high.


The chief actuary, Alan Milligan, recommended an even steeper cut by Calpers to 7.25%, saying that would reflect lower inflation expectations and build a cushion if the pension system’s results turn out to be disappointing.

He said the 7.5% rate was also prudent, adding that he believes Calpers has a 50-50 chance of meeting that goal.

Source: The Wall Street Journal

>>  Click here for more from The Wall Street Journal