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Asset Allocation

CalPERS Mulls Fixed-Income Future

Proposed changes would maintain the portfolio's heavy tilt to global equities, while likely increasing investments in fixed-income.

By Bailey McCann

The California Public Employees’ Retirement System (CalPERS), the largest US pension fund, will consider significant changes to its allocation targets in a workshop being held today.  According to a presentation released by the pension, four possible portfolios are being considered that have a range of changes, including a significant increase in fixed-income investments.

Right now, the $343.6 billion pension is 50% invested in global equities, followed by a 19% allocation to fixed-income, with the remaining 31% split between inflation assets, infrastructure, private equity, and real estate. The proposed changes would maintain the portfolio’s heavy tilt to global equities, while likely increasing investments in fixed-income. The proposed increase in fixed-income ranges from 28% in one option, to as much as 44% in another.

The new portfolio mix would also put infrastructure and real estate into the real assets category and increase the investment target to 13%. Currently, infrastructure and real estate account for 2% and 9% of the portfolio, respectively. The proposed changes also cut CalPERS’s current 8% allocation to inflation assets entirely. CalPERS’s investments in private equity will remain at the current 8% rate.

By reorienting the portfolio to a larger fixed-income allocation, the fund’s average expected return will drop to 6.5% from 7%, owing to low bond yields. That change would require larger payments into the pension in order to maintain funding goals. CalPERS’s funded status has already dropped from 76% in 2013, to 68% as of June 30, 2017. Only one proposed portfolio would increase the return goal to 7.25%, but that is also a riskier asset mix with higher allocations to global equities and an unchanged allocation to fixed-income.

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Making a push for bigger payments could be a tough sell at CalPERS. Board members have already voiced opposition to higher payments. The pension is also considering a change to its pension debt repayment schedule that would backload payments and extend the timeline for repayment, an option that was heavily criticized in a local editorial last week.

The pension board is slated to vote on the proposed changes and pick a new portfolio mix in mid-December. If changed, the new portfolio would go into effect on July 1, 2018. CalPERS re-evaluates its portfolio mix every four years. The current portfolio was approved in 2013.

For any fact checking – this is on page 5 of the power point.

For fact checkers – this is noted in the “discount rate” table on page 26. The discount rate is the average expected return of the total portfolio.

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Home > News > Regulation > Kentucky Education Groups Offer Alternative Pension Reform Plan
Regulation

Kentucky Education Groups Offer Alternative Pension Reform Plan

Coalition calls for less generous plans, but nixes switch to DC.

By Michael Katz

An alliance of Kentucky education groups has come up with an alternative pension reform plan to the one recently offered by Gov. Matt Bevin, which involves moving participants to a defined contribution plan.

“The governor’s plan does many things that, by our estimation, will destroy public service as we know it,” said Stephanie Winkler, president of the Kentucky Education Association, at a news conference. “Most of all, the switch from a dependable, reliable pension to an unreliable and very expensive defined-contribution plan.”

The groups, which represent teachers, superintendents, and school boards, have recommended a less generous defined benefits pension for employees hired at school districts after July 1, 2018, according to the Lexington Herald-Leader. The new tier of teachers and employees would have to work longer, and they would not be allowed to enhance their pension benefits through unused sick leave.

Under the groups’ plan, future teachers would contribute 10% of their pay, with a 6% match by the state government. Retirement eligibility would be based on the so-called “rule of 85,” which means the teacher’s age plus their years of service would have to equal 85. For example, a 60-year-old teacher with 25 years in the classroom could retire on a full pension.  

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Additionally, any unfunded liabilities created by new workers would be the responsibility of them and their school district, not the state government’s responsibility. If the pension funding level for the new workers falls below 95% in the future, cost-of-living adjustments for retirees could be reduced or suspended, employees and school districts could be required to increase their contributions, and retirement eligibility rules could be made stricter.

The groups are also calling for the County Employees Retirement System to be removed from the rest of Kentucky Retirement System, and run separately with its own elected representatives.

Tom Shelton, the Kentucky Association of School Superintendents’ executive director, told the Herald-Leader that the groups tried to show their plan to Bevin’s office, but that his office refused to consider any suggestions that did not involve switching to defined contribution accounts.

However, Bevin spokeswoman Amanda Stamper said the groups never offered the governor their pension reform plan.

“The Bevin Administration met with Tom Shelton several times over the last two months,” Stamper said in a statement. “Even though they had several opportunities, neither ever presented an alternate plan.”

According to a new analysis by Cavanaugh Macdonald Consulting, the governor’s pension reform plan would cost taxpayers an extra $4.4 billion over the next 20 years, reports the Associated Press.

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