CalPERS to reduce expected investment return rate to 7% in three years time

On December 21st the California Public Employees Retirement System board came to an agreement to reduce the pension plans expected rate of return to 7% by the year 2020, as the public pension fund fell short of its 7.5% objective during the past 2 years.

According to the boards decision, the expected rate of return an investment generates (also known as “discount rate”) will be cut to 7.375% during fiscal year 2017-18. During fiscal years 2018-19 and 2019-20 the rate will be reduced further to 7.25% and 7% respectively.

“This was a very difficult decision to make, but it is an important step to ensure the long-term sustainability of the Fund,” said Rob Feckner, president of the CalPERS Board of Administration, cited by Reuters. “We know this will have an impact on the state, schools, and public agencies that partner with us, and were committed to making sure the changes are implemented in a phased approach so our employers and affected members have time to plan their budgets responsibly,” Feckner noted.

According to the Pew Charitable Trusts public sector retirement systems project, the 100 largest pension plans in the United States generated a rate of return of 7.6% on average during fiscal year 2015. In the mean time, 7 pension plans in states such as Indiana, Virginia, Idaho and Wisconsin assumed an investment return rate of 7% or lower.

At present, the $300 billion CalPERS fund is 68% funded, after recently becoming cash negative. The pension plan paid out benefits valued approximately $19 billion during fiscal year 2015, while collecting approximately $14 billion in the form of workers contributions.

Only time will show whether other pension plans of similar scale across the United States will follow CalPERS example and revise down their return rate objectives.