CalPERS Introduces New Trust Portfolio to Ease Employers’ Woes

State delivers a unique avenue for employers to mitigate contribution volatility.

The nation’s largest pension fund finally implemented a long-coming plan, setting up a trust fund that allows public employers to prefund their pension liabilities.  The fund provides a vehicle for investments designed to accumulate assets over time to mitigate employers’ difficulty with managing long-term costs and fees.

Called the California Employers’ Pension Prefunding Trust (CEPPT), the new fund “gives public agencies an opportunity to save and plan ahead,” said California Employees Retirement System, (CalPERS) Chief Executive Officer Marcie Frost. “Prefunding is a smart and efficient approach for employers to mitigate risk increases and temper contribution volatility. Benefits are only as secure as our employers’ ability to pay them.”

The asset allocation of the trust’s portfolio is designed with a focus on the relatively short timeframes that participants will remain in the trust, putting an emphasis on a portfolio strategy for short- and medium-term investments.

The board reviewed potential asset allocations for the two diversified strategies in June. Five separate portfolios were considered, and the two selected allocations and an explanation of the reasoning behind these selections is detailed in the chart below:

Source: CalPERS

“A conservative portfolio is recommended for the trust portfolio 2, to accommodate a shorter investment horizon and lower risk tolerance,” Alison Li, investment manager, Trust Level Portfolio Management at CalPERS, said at the June meeting. “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.”

The selected allocations also provide low investment management fees, with an annual fee of 0.25%, as well as improved financial security for active employees and retirees.

“We are excited to partner with local agencies and give them a tool they requested,” said Michael Cohen, CalPERS’s chief financial officer. “The trust will help local agencies reduce future obligations, reduce risk on their balance sheets, and address their future costs.”

The retirement system recently announced investments in its home state grew 11.6% in the 2017-2018 fiscal year.  

Related Stories:

CalPERS Sets Up Trust to Allow Employers to Prefund Contributions

CalPERS In-State Investment Program is Up More than 11%

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