CalPERS and CalSTRS hit back at Stanford study

  • By: Giovanni Legorano
  • 09 Apr 2010
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US – Californian schemes have dismissed the conclusions of a study by the Stanford Institute for Economic Policy Research (SIEPR), which claimed the funding level of the three largest Californian pension funds has so far been understated due to the accounting rules used.

Both the California Public Employees' Retirement System (CalPERS) and the California State Teachers' Retirement System (CalSTRS) denied the funding level of the three largest Californian pension funds - CalPERS, CalSTRS and the University of California Retirement System (UCRS) - corresponded to a shortfall of more than half a trillion dollars, as SIEPR said. (Global Pensions, April 6, 2010)

CalPERS chief investment officer Joe Dear wrote in an article published today by the San Francisco Chronicle: "The study is fundamentally flawed because it is based on a what-if scenario that does not reflect how most public pension funds invest their assets."

He said SIEPR used a "controversial method that is out of step with governmental accounting standards", because it assumed that if CalPERS and the other public pension funds invested only in "risk free" bonds and lowered their assumed rate of investment return by half, projected pension liabilities would be much higher.

SIEPR used lower risk-free discount rates because it said it considered vested public pensions "effectively riskless", as their payment is guaranteed. CalPERS and the other schemes used Governmental Accounting Standards Board rules, which say schemes should discount future pension liabilities at the same rate they expect to earn every year on invested assets.

The latest data published by the three funds see combined unfunded liabilities as of July 1, 2008 - calculated with discount rates ranging from 7.5% to 8% - stand at US$55.4bn, while SIEPR calculates they actually stood at $425.2bn, if a lower rate of 4.14% were used.

Dear added: "The problem with this "finding" is that it is purely hypothetical; CalPERS and other pension funds invest well-diversified portfolios across all investment asset classes."

In an emailed statement, CalSTRS spokesman Ricardo Duran told GP long-term investment returns were the "most appropriate measure" of the fiscal health of the pension system and the soundness of contribution levels.

He said: "Adjusting the discount rate to reflect lower risks, and less diversification of the portfolio, is an academic, rather than a market approach. Using debt securities in lieu of historical market performance to measure the ability to fund future liabilities appears to be a short-sighted vision."

UCRS did not reply to an email seeking comment.



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