March 15, 2011
External Affairs Branch
Patricia K. Macht, Director
Brad Pacheco, Chief, Office of Public Affairs
Contact: Edward Fong, Information Officer
CalPERS Discount Rate Unchanged
Assumed Investment Return Rate to Stay at 7.75 Percent
SACRAMENTO, CA – A key committee of the California Public Employees' Retirement System (CalPERS) Board of Administration today voted to keep the Pension Fund's assumed annual rate of investment return, also known as the discount rate, at the current 7.75 percent. The recommendation by the Benefits and Program Administration Committee goes to the Pension Fund's full Board tomorrow.
The discount rate represents what a pension fund believes it can realistically earn from its investments on an annual basis when averaged over the course of 20 years or more. In any given year, investment returns are likely to be higher or lower than the long-term assumed rate.
Over the past 20 years, including the two recent recession years, CalPERS has earned an average annual 7.9 percent rate of return before deducting administrative and investment expenses. For the fiscal year that ended June 30, 2010, CalPERS earned a 13.3 percent return.
"According to our actuaries, maintaining our discount rate at its current level is prudent and reasonable," said Rob Feckner, CalPERS Board President and Vice Chair of the Board's Benefits and Program Administration Committee. "Given the current economic environment, we believe keeping our discount rate unchanged is in the best interest of our members, employers, and taxpayers."
CalPERS Chief Actuary Alan Milligan recommended that the Pension Fund adopt a lower discount rate at 7.50 percent, but indicated to the Committee that keeping the rate unchanged was prudent.
"As pension fund administrators, we want to make sure CalPERS remains financially sound over the long term," said CalPERS Chief Actuary Alan Milligan. "The discount rate adopted is reasonable and achievable, and appropriate for funding the promised benefits."
The committee made its decision following a comprehensive review and adjustment of the Pension Fund's asset allocation and a detailed actuarial analysis. In December 2010, the Board adopted an asset allocation mix that slightly decreased the allocation for traditional bonds and shifted the funds to inflation-protected bonds and commodities to reduce volatility risk.
The highly diversified CalPERS investment portfolio has an allocation target of 49 percent publicly traded stock, 16 percent bonds, 14 percent private equity, 13 percent real assets – real estate, infrastructure, and forestland – and the remaining 8 percent in smaller allocations in asset classes designed to minimize volatility and liquidity risk.
As a part of its analysis, CalPERS staff, using the revised asset allocation, generated 10,000 investment performance scenarios covering the next 60 years. The analysis concluded that expected returns will average 7.38 percent in the first 10 years and 8.50 percent in years 11 and beyond, which resulted in a 7.95 percent average annual return over 20 years or more.
Based on the historical performance of the different asset classes and sophisticated computer analysis, the updated asset allocation is expected to produce an average annual return of 7.95 percent over the next 20 years or more, with a 50-50 chance that returns will be either higher or lower. With historical administrative expenses of 0.15 percent, the expected net return rate is 7.80 percent.
CalPERS reviews its asset allocation and assumed rate of return, and makes any necessary adjustments, every two to three years. CalPERS last adjusted its discount rate in 2004, when it was lowered from 8.25 percent to 7.75 percent.
CalPERS is the largest public pension fund in the U.S. with assets of nearly $228 billion. The retirement system administers pension benefits for more than 1.6 million current and retired California public employees and their families on behalf of the State of California and 3,000 local public agencies and school districts. It also administers health benefits for 1.3 million enrollees. More information about CalPERS is available at www.calpers.ca.gov.