The California Public Employees’ Retirement System (CalPERS) this week approved a new tactical asset allocation for a new trust fund that allows public employers throughout the state to provide a defined benefit pension plan to their employees to prefund their required pension contributions, and invest those payments in a trust.
“The pension prefunding trust is in essence, almost a defined contribution plan for employers that elect to make additional contributions in anticipation of potential eventual contributions that will need to be made to the pension fund,” said Eric Baggesen, senior investment officer of Global Equities at CalPERS.
The tax-exempt trust was launched Jan. 1 through state Senate Bill 1413, in response to potential rising pension costs over the next several years. The asset allocation is heavily influenced by the relatively temporary nature of participants in the trust, and subsequently its portfolio was coined with a short to medium time horizon.
“The purpose of [the trust] is to temper the contribution volatility in the next several years, and to mitigate the sharp increase in required contributions in the next 10+ years,” said Alison Li, investment manager, Trust Level Portfolio Management at CalPERS. “The estimated risk tolerance is expected to be low to medium, and this is consistent with the purpose of the trust.”
The portfolios under consideration include:
Source: CalPERS
“A conservative portfolio is recommended for the trust portfolio 2, to accommodate a shorter investment horizon and lower risk tolerance,” Li said. “Staff propose portfolio 4 over portfolio 3, because portfolio 3 doesn’t offer enough difference from portfolio 2, and is also preferred to P5 because P5 has high volatility, which is not advised for investors with low to medium investment horizons and low to medium risk tolerance.”
CalPERS Assistant Division Chief Arnita Paige explained CalPERS staff decided to offer two separate strategies within the trust after reaching out to employers to understand what they were looking for. “What we learned was some are actually conservative, [some] moderate, and some aggressive. With this program, which is to serve the entire population [of the state], we thought that two investment strategies would be best,” Paige said.
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Tags: Alison Li, CalPERS, Pension, Prefunding