Top US pension fund set to adopt RI’s 7.5% investment outlook
March 13th, 2012 at 4:23 pm by Ted Nesi under Nesi's Notes, On the Main Site
It looks like the nation’s largest public pension fund will follow the example set by Rhode Island, the L.A. Times reports:
A key committee of the board of the California Public Employees’ Retirement System on Tuesday voted 6 to 2 to cut its benchmark assumed rate of return on its investments to 7.5% from a two-decade-old target of 7.75%. …
Alan Milligan, CalPERS’ chief actuary, recommended that the pension fund’s discount rate, which forecasts assumed rates of return on its $236-billion investment portfolio, be lowered to 7.25%.
The bigger change, Milligan said, “is the best course of action for this fund in the long term.” He predicted that CalPERS had a 54% of reaching the 7.25% goal, but only a 1-in-2 possibility of hitting 7.5% in any given year.
The committee, after hearing testimony from local government officials and public sector labor union representatives, voted to take the more conservative approach.
In practice, this change is less dramatic than what happened in Rhode Island – since CalPERS starts at 7.75%, this would be a decrease of 25 basis points, compared with Rhode Island’s one-time decrease of 75 basis points. But it does make Rhode Island’s outlook seem like less of an outlier.
Rhode Island’s 36 independent city and town pension funds set their own investment return forecasts, which range from 8.5% to 7%. Providence recently lowered its forecast from 8.5% to 8.25%.
It’s worth noting, too, that changing the investment forecast was only one of the changes made on paper that ballooned Rhode Island’s pension liability last spring. New longevity forecasts that predict longer lifespans for pensioners also had a major impact, as Paul Valletta memorably noted.
• Related: Investment expert: ‘Getting 7.5% … is going to be a challenge’ (Oct. 28)
Tags: bonds, california, calpers, economy, pensions, raimondo-chafee, retirement board, treasury
Nesi's Notes covers politics and the economy in and around Rhode Island for WPRI.com. (Twitter: 
Ha! “Less of an outlier.” I love it. Yes, governments across the nation are willing to stake the health of their pension systems on “a 1-in-2 possibility of hitting [their target] in a given year.” We should all feel comforted (especially those counting on those pensions for their retirement).
Watch it or I’ll start trolling your new articles too!
So only 101 plans will use a higher rate than Rhode Island, or is the chart shown above outdated?
A little outdated – that’s the FY10 one, so it was done sometime in late 2010 or early 2011.
Justin Katz: Getting numbers wrong since…when did Anchor Rising start?
It’s getting humorous, Pat. I’m essentially making the point that YOU should be making on behalf of your union’s members: that the predicted rate of return is absurdly high and will leave YOUR pension system underfunded in the future.
But then, you’ve never put much effort into reading the arguments of those whom you oppose, because the objective is simply to demonize and marginalize, isn’t it?
Justin, sorry you don’t get it. Even 7.25 is unrealistic when you’re talking about the security of pensions. But the unions continue to support unrealistic assumptions because if the assumed rate were adjusted to anywhere near reality, the state would be so much further in the hole that services would have to be slashed to a level that would essentially put the state out of business as an effective government or taxes would have to be raised to a level that would cause a taxpayer revolt, or both. Even with “pension reform”, if the rate of return assumption is left at 7.5, we will just be dealing with this issue again 10 or 20 years from now. Welcome to Rhode Island, the state motto should be “Rhode Island, the kick the can into the future state.”
My concern is the poor RI state pension fund returns for 2011– 1.4% which was next to the bottom of 1.1% that was attained by CalPers (ironically). If the investment choices are poor, it wouldn’t matter what the rate of return is. Read an earlier post by Ted Nesi in February 2012 which quotes an analysis by Cate Long of Reuters in Dec. 2011 (link available in Mr. Nesi’s article.
Here’s the article from January that Lucy referred to:
http://blogs.wpri.com/2012/01/26/raimondo-avoiding-risk-after-ri-pension-fund-earns-1-4-in-11/