CalPERS’ board on Wednesday approved a risk-reduction plan that will shift investments away from equities and could reduce the expected rate of return of the nation’s largest pension fund to 6.5% from 7.5%. The reduction could take more than 20 years to occur, prompting some criticism during the meeting that the pension fund is acting too slowly.

Equities make up around half of CalPERS’ $289.3 billion portfolio as of Sept. 30, and the plan is aimed at moving money to more conservative investments, such as fixed income, to mitigate the efforts of another major economic downturn. CalPERS lost about a quarter of its assets during the financial crisis.

The plan begins rate reductions when CalPERS’ rate of return exceeds the 7.5% by four percentage points or more in a given year.

Most CalPERS board members praised the move. However, board member Richard Gillihan said the plan would take too long to reduce investment risk. “I think we’re missing an opportunity to be bold,” Mr. Gillihan said. He proposed immediately reducing the rate of return to 6.5%.

In a 7-3 vote, the board rejected a more aggressive plan suggested by the finance and administration committee on Tuesday. CalPERS spokesman Joe DeAnda said the rejected plan would have begun reductions in CalPERS’ rate of return when returns exceeded the 7.5% current rate of return by two percentage points or more in a given fiscal year.

Under the plan adopted, if actual investment returns reached 11.5%, then the rate of return would be decreased by five basis points. For each additional three-percentage-point increase in returns up to 13 points above the assumed rate of return, an additional reduction of five basis points is taken. A final increment of four percentage points to 17 points above the assumed return rate would lead to an additional reduction of five basis points.

The maximum reduction in the assumed rate of return allowed under the plan would be 25 basis points in a given year.

Rates would not be reduced in years that CalPERS did not have at least an 11.5% return. Originally, the CalPERS board was also looking at a proposal that would have reduced the rate of return periodically regardless of returns. But board members said they were concerned that proposal would have put too high of a burden on local governments, state government and school districts that fund CalPERS’ benefits.

The California Public Employees’ Retirement System, Sacramento, move comes as many public pension funds have reduced their assumed rate of return or are considering it in attempts to mitigate risk and deal with capital market assumptions that show a 7.5% rate of return might be unrealistic to achieve over the next decade.

Source: Pensions & Investments