Monday, March 1, 2010

Calpers Considers Cutting Rate of Return Target

Calpers is considering taking some drastic action on the heels of the bruising 23% decline its investments posted for its last fiscal year ended June 30th. The mammoth pension fund that manages approximately $200 billion in assets for California's pensioners is contemplating reducing its current projected rate of return from 7.75% to maybe something with a six handle. You see, it was time to take some decisive action. What could be more effective than tweaking an imaginary number and using that as a basis for all future investment decisions?

I totally understand the decision. I did the same thing with my own investments. In fact, I just resolved my looming retirement fund issues by raising my return "target" from 8% to 35%. Now I should have no problem retiring with a cool $100 million in the bank. Problem solved.

A logical person might ask why Calpers chose to lower its imaginary rate of return number instead of raising it to plug the hole in its future obligations? Imaginary (and scary) as it might be, the percentage is an important factor in calculations by Calpers officials of future contributions needed from employees and local governments to cover payouts promised to retirees and other beneficiaries. If return assumptions decline, contributions have to rise. Uh yeah, because California has so much extra money lying around that it's going to be thrilled to increase its contributions to the pension fund that pissed away retiree assets while making private equity and real estate investment fund managers rich. In case the folks at Calpers haven't been keeping up with current events, California is mired is some pretty serious budget poop. This is not exactly the right time to go hat in hand to the state and local governments.

Additionally, the pension fund believes that lowering the rate of return would "reduce the temptation" to seek outsize profits through real-estate, private equity and other alternative investments. This decision would've been brilliant had it been made like three years ago. Now? Maybe not so smart. In any event, the final decision isn't expected until early 2011. So they have another year or so to debate whether the right number is 6%, 6.1%? How about 6.5%?

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