Actuary: CalPERS Should Slash Assumed Rate to 7.25%

(March 7, 2012) — The largest public pension in the United States may slash its assumed rate of return on assets to 7.25% from 7.75%, as recommended by Alan Milligan, California Public Employees’ Retirement System (CalPERS) Chief Actuary.

An agenda item released by the fund on the revised discount rate stated the following:

“In order to keep economic assumptions current, it is essential to review actuarial assumptions periodically. The price inflation assumption is currently 3% and this assumption was last reviewed in 2004. The real wage inflation assumption is currently .25% above price inflation (3.25%) and was last reviewed in 1998. The real discount rate assumption was last reviewed in March 2011 and is currently 4.75% above inflation (7.75%).”

Milligan’s recommendation will proceed to CalPERS’ board, which will vote on whether or not to accept the proposal. 

Last month, in an interview with the Public Retirement Journal, Milligan told the Journal that he hadn’t seen anything in the current environment that would cause him to recommend a drop of more than 0.25% in the discount rate — the same recommendation he gave last year. Milligan is responsible for developing CalPERS actuarial policies, overseeing actuarial staff and operations, and advising the CalPERS Board of Directors. He also serves as Chair of the California Actuarial Advisory Panel, the independent body created to provide information on pensions, OPEBs, and best practices to the Legislature, Governor, and local agencies, the fund outlined in a release. 

CalPERS is not the only scheme to face resistance and concerns over its projected returns. 

In January, Robert North, New York’s chief actuary, recommended that the city’s schemes lower its assumed annual rate of return on assets to 7% from 8%. 

Meanwhile, New York State’s pension system lowered its rate from 8% to 7.5% in 2010; the Illinois State Employees’ Retirement System made a similar cut, from 8.5% to 7.75%. In September of last year, Joe Dear, the investment chief of CalPERS, expressed that a 7.75% return may be tough to meet. In an interview with aiCIO featured in its Summer Issue, Dear commented on the fund’s stellar returns, lowering expectations of future similarly stellar performance by saying: “Honestly, and not taking anything away from the team here, our 20.7% returns in fiscal 2011 were largely the result of market beta. Public equities are about half our $234 billion portfolio, and it is no secret that public equities significantly increased in value over the past year.”

Summarizing his perspective on CalPERS’ 2011 investment return and his future outlook, Dear told aiCIO: “Obviously, a 20% return undermines the statements of public pension fund critics—that we are unable to reach our target. I think that’s important—that there is still a lot of earning power in these assets—but let’s be clear: There won’t be a string of 20% years in a row.”