The board of the nation’s largest public pension fund, the California Public Employees’ Retirement System, voted to leave unchanged its expected investment return rate, whch has been set at 7.75% since 2004. The board made its decision even though over this same time period (7 years) the S&P 500 annualized return has averaged 5.86% and during this same time period a portfolio mix of 60% stocks, 35% bonds and 5% cash equivalents has averaged 5.75%. The annualized return for the S&P 500, including dividends paid out, from 2000 through 2010 has averaged under 3%. This actual rate of return does not include CalPERS’ extensive real estate holdings that we know have been seriously impacted in the last 4 years.
So why did the CalPERS board keep the 7.75% expected rate of return when they try to figure out whether there will be enough money in the cookie jar to pay out future retirement benefits at levels that are currently promised? Why? Probably because if the pension fund had reduced its expected investment rate of returns, then cities and schools that rely on CalPERS for their pensions would have had to further increase their annual pension payments. Politically, this would have been a very, very hot potato.
“Given the current economic environment, we believe keeping our discount rate unchanged is in the best interest of our members, employers, and taxpayers,” said Rob Fechner, CalPERS board president, in a statement.
In my opinion, the consequences of the board’s miscalculating by approximately 2% return a year on the $228 Billion assets in the fund will equate to a $4.75 Billion shortfall for every year since 2004 and likely to keep going forward. You cannot pay out all promised benefits in the future if the money is actually not there.
Written By Robert Fields at Sequoia Pacific Mortgage. For more information on this topic or to speak with Robert Call 707-575-3220 or email Robert at Robert@sequoiapacificmortgage.com
