CalPERS Mulls Fixed-Income Future

Proposed changes would maintain the portfolio's heavy tilt to global equities, while likely increasing investments in fixed-income.

The California Public Employees’ Retirement System (CalPERS), the largest US pension fund, will consider significant changes to its allocation targets in a workshop being held today.  According to a presentation released by the pension, four possible portfolios are being considered that have a range of changes, including a significant increase in fixed-income investments.

Right now, the $343.6 billion pension is 50% invested in global equities, followed by a 19% allocation to fixed-income, with the remaining 31% split between inflation assets, infrastructure, private equity, and real estate. The proposed changes would maintain the portfolio’s heavy tilt to global equities, while likely increasing investments in fixed-income. The proposed increase in fixed-income ranges from 28% in one option, to as much as 44% in another.

 The new portfolio mix would also put infrastructure and real estate into the real assets category and increase the investment target to 13%. Currently, infrastructure and real estate account for 2% and 9% of the portfolio, respectively. The proposed changes also cut CalPERS’s current 8% allocation to inflation assets entirely. CalPERS’s investments in private equity will remain at the current 8% rate. 

By reorienting the portfolio to a larger fixed-income allocation, the fund’s average expected return will drop to 6.5% from 7%, owing to low bond yields. That change would require larger payments into the pension in order to maintain funding goals. CalPERS’s funded status has already dropped from 76% in 2013, to 68% as of June 30, 2017. Only one proposed portfolio would increase the return goal to 7.25%, but that is also a riskier asset mix with higher allocations to global equities and an unchanged allocation to fixed-income. 

Making a push for bigger payments could be a tough sell at CalPERS. Board members have already voiced opposition to higher payments. The pension is also considering a change to its pension debt repayment schedule that would backload payments and extend the timeline for repayment, an option that was heavily criticized in a local editorial last week.

The pension board is slated to vote on the proposed changes and pick a new portfolio mix in mid-December. If changed, the new portfolio would go into effect on July 1, 2018. CalPERS re-evaluates its portfolio mix every four years. The current portfolio was approved in 2013.

For any fact checking – this is on page 5 of the power point.

For fact checkers – this is noted in the “discount rate” table on page 26. The discount rate is the average expected return of the total portfolio.

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