US - Actuaries for the California Public Employees' Retirement System are recommending trustees cut the discount rate by 25 basis points to 7.5%.
In a memo to be discussed at the benefits and programme administration committee meeting on 15 March, the $226bn scheme's actuaries said the new rate reflects lower expected returns going forward. It also reflects the new asset allocation adopted in December which divides assets into so-called risk buckets - inflation, growth, income, real returns and liquidity. (Global Pensions; 14 December 2010)
The current rate of 7.75% takes into account a 3% inflation assumption and a real return assumption of 4.75%.
"There appears to be a consensus that returns are expected to be lower than historical returns over the next 10 years and the expected returns that were presented to the Board reflected that," the memo says.
Lowering the discount rate will lead to an additional burden on the already cash-strapped state agencies. Public safety agencies, for example, could see their contributions increase from 3% of payroll to 5%.
If approved by the benefits committee, the motion will be sent to the full board for a vote.
Separately, the investment committee will review the fund's returns for the fourth quarter of 2010. The pension fund returned 5.6% in Q4, falling just shy of its return target of 5.8%. The $16.6bn real estate programme returned 3.3%, underperforming its target by 130 basis points while the private equity programme returned 7.9%, 430 basis points below its target. The other asset classes outperformed their targets.
Earlier this year, CalPERS overhauled its real estate programme and implemented a "back-to-basics" strategy that focuses on direct investments and limits debt. (Global Pensions; 5 February 2010)
In January, the fund said it returned 12.5% for 2010.
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