CalPERS officials said Tuesday their new risk-management strategy will gradually shore up the pension fund’s finances even though it will usually lead to lower investment profits.
“We believe that (policy) does strengthen the system over the long term,” said CalPERS Chief Financial Officer Cheryl Eason in a conference call with reporters. “It will result in the lower risk profile that we’ve been talking about.”
Fewer risks generally mean lower profits, which will almost certainly translate into higher pension contributions from state and local governments. But Eason said the conservative approach will help buffer CalPERS from crashes of the sort experienced in 2008, when the pension fund lost more than 20 percent of its portfolio.
“We’re looking to smooth out (risk) not take as great a hit” during a crash, Eason said.
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Her comments came one day after the California Public Employees’ Retirement System released a proposed “funding risk mitigation policy” that would alter the way CalPERS adjusts its discount rate. The closely watched rate, currently 7.5 percent, serves as a forecast of annual investment returns and is important in guiding how CalPERS invests its money.
In what is believed to be an unprecedented policy, the rate would automatically drop after years in which CalPERS achieves stronger-than-expected returns.
The decreases would be incremental, no more than a quarter-point in any given year. Eason said CalPERS believes the rate would fall to 6.5 percent in about 30 years.
Eason and CalPERS spokesman Brad Pacheco said the pension fund’s governing board would retain the authority to override the mechanism if it believes adjustments are needed.
The pension fund considered more aggressive approaches that would reduce the discount rate more quickly, but opted for this proposal after hearing from government agencies looking at the prospect of higher pension contribution rates as profits decline. “Some (agencies) have the financial means to absorb something in the future and some do not,” she said. “We’ve tried to strike a balance.”
As it is, CalPERS is raising rates significantly, in part to cover predictions of retirees living longer as well as other factors. The $294.9 billion fund is also still struggling from the effects of the 2008 crash. Eason said CalPERS is about 73 percent to 75 percent funded, an estimate of dollars on hand when compared to total long-term pension obligations.
The new policy will be discussed by the board’s finance and administration committee next Tuesday, although a vote isn’t expected until November.