Business & Real Estate

CalPERS board votes to reduce investment risk, earnings expectations

CalPERS approved a new investment strategy Wednesday that’s designed to reduce risk in its $291.4 billion portfolio.

Pension fund officials said the strategy will gradually improve CalPERS’ finances by cushioning it against heavy losses when the markets turn sour, using a mechanism that’s expected to take 21 years. But because safer investments generally yield lower returns, the strategy will likely mean higher annual pension contributions from state and local governments, and public employees.

Board members called the new plan, approved on a 7-3 vote, a smart way to deal with increasingly turbulent investment markets. “This is a real historic moment,” said board member Priya Mathur.

But Gov. Jerry Brown issued a statement blasting CalPERS for not cutting risk quickly enough. He said the “irresponsible plan...will expose the fund to an unacceptable level of risk in the coming years.”

The plan is aimed at lowering the California Public Employees’ Retirement System’s “discount rate,” a forecast of annual investment profits. The rate is currently 7.5 percent.

The CalPERS governing board agreed to a mechanism that’s expected to reduce the rate to a more conservative 6.5 percent within 21 years. The board overturned a slightly more aggressive risk-reduction plan approved a day earlier by its finance and administration committee, which would have accomplished the same goal in 19 years. The committee rejected a plea by the governor to slash the discount rate in just five years.

Public employee labor unions, wary of putting too much financial stress on their employers, supported the gentler glide path that was approved Wednesday.

The new plan reduces the discount rate slightly every year in which CalPERS beats its investment forecast by at least 4 percentage points.

CalPERS officials said the new system will stabilize the fund and eventually make CalPERS “fully funded.” The pension fund currently has 76 cents for every $1 of long-term pension obligations.

Dale Kasler: 916-321-1066, @dakasler