A Large Equity Drawdown Would Cause Major Problems for CalPERS

Poor equity performance is the biggest risk for the largest US pension plan, review shows.

A review of the investment portfolio of the $337.2 billion California Public Employees’ Retirement System (CalPERS) says that a “severe and or sustained drawdown” in its global equity portfolio is the biggest risk to the retirement plan.

The review contained in agenda material for the system’s investment committee meeting on February 19 says that over the past 20 years, two such events have occurred: the global financial crisis and the tech crash and recession.

“Such losses today would leave the funded status of the plan below 50%,”  the review noted. CalPERS currently has around a 71% funding ratio, below the 80% benchmark that healthy pension plans shoot for.

CalPERS said its model showed if the global financial crisis, which took place from October 2007 to March 2009, occurred today, the pension plan would have a 32% investment loss, resulting in a decline of $107 billion in assets. The funding level for the pension plan would drop to 42%, the simulation shows.

Retirement plan officials say in the review that if the tech crash and recession, which lasted from January 2000 to March 2003, occurred today, it would have resulted in a 21% decline in the portfolio, or $71 billion. The funding ratio for the plan would drop to 49% under that simulation.

Global equities is CalPERS’s largest asset class with an asset value of $160.1 billion as of Dec. 31.

The trust level review notes that investment results at CalPERS are primarily driven by growth assets. Besides public equities, CalPERS’s $27.8 billion private equity asset class is also considered a growth asset.

CalPERS reported a -3.5% portfolio return for the calendar year of 2018 due to volatile markets. The worst-performing asset class was public equities, with a -8.9% return, followed by a -5.3% return in inflation assets, and a -1.3% return in fixed income. Private equity, the other growth asset, saw returns of 12.5% in the calendar year, while real assets, which includes real estate, had a 4.2% return.

The pension plan’s new chief investment officer, Ben Meng, is expected to discuss the returns at the meeting.

Ultimately, the returns that count for CalPERS and its funding level are those of the state fiscal year, which runs from July 1, 2018, to June 30, 2019.

CalPERS officials have not yet discussed what effect an upswing in the stock market in January had on its portfolio. At the California State Teachers Retirement System (CalSTRS), the second-largest US plan, investment performance totaled -3.2% for calendar year 2018. However, when January 2019 was taken into account, CalSTRS was at a break-ever point for the 2018-2019 fiscal year.

A separate report by CalPERS general investment consultant, Wilshire Associates, to be presented at the February 19 meeting, said the US stock market was down -14.29% for the fourth quarter of 2018 and -5.27% for the year. The fourth quarter was the worst quarter for the stock market since 2011, Wilshire said.

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