CalPERS Sets Up Trust to Allow Employers to Prefund Contributions

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.”

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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

The long ascendency of the US dollar is nearing a reversal, according to PIMCO.

The dollar, which has been on the upswing since 2011, will at last start to ebb, said Gene Frieda, a PIMCO strategist in London. The US currency’s strong run “is close to an end,” he said, pointing to slowing American economic growth and the Federal Reserve’s apparent plans to whittle interest rates.

The currencies of emerging markets and Japan are undervalued and could benefit from the dollar’s waning, he told Bloomberg TV.

The dollar has risen by 53% over the past five years, helped by an expanding US economy and, starting in late 2015, a Federal Reserve campaign to hike interest rates, which made US investments more attractive. The buck’s value, though, has flatlined this spring amid the Fed’s decision to suspend its rate increases.

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And after the Fed’s policymaking meeting Wednesday, when it strongly hinted it would reduce short-term interest rates up ahead, US Dollar Index futures fell by 0.5% Thursday, and so did the spot price.

The dollar has an advantage over other denominations because it is the world’s reserve currency. The greenback is used for half of all cross-border transactions, and most commodities are valued in dollars. Dollars make up 61% of central banks’ currency reserves, which are used for transactions. Some nations, like Turkey, which has a lot of dollar-denominated debt, say the US currency’s high-flying status has harmed them.

What would happen if the dollar dropped? The large US trade deficit likely would narrow. Right now, US exporters operate at a disadvantage overseas, as their products are costlier than local goods and services. The Kyriba consulting firm estimates that the strong dollar knocked a nickel off average US earnings per share in last year’s final quarter.

For that reason, President Donald Trump wants to see a weaker dollar, on the theory that this would enhance American manufacturing and jobs when he runs for reelection next year.

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Tags: dollar, Donald Trump, Earnings, PIMCO, trade deficit