CalPERS chief to cut volatility of pension fund

WALNUT CREEK, California The California Public Employees' Retirement System, projected to have negative cash flow for at least the next 15 years, is looking to recast investment priorities to slash the complexity and volatility embedded in its $301-billion portfolio, officials said on Tuesday.

Fund officials, recognizing that the wave of retiring baby boomers means it will pay out more in benefits than it takes in from contributions and investment income - a gap that could reach $10 billion by 2030 - are expecting to pivot more toward assets that deliver reliable income than in the past.

"From this year going forward, we're entering an era where the investment portfolio will be responsible for making up that gap in cash flows in ever increasing ways," Chief Investment Officer Ted Eliopoulos told Reuters in an interview.

Across the country, public pension funds are tackling a similar challenge as the cities, counties and states that run them are struggling to keep up with mandated contributions, most retirement systems are underfunded, and investment returns are choppy.

Investment decisions and strategies followed by Calpers, the largest U.S. pension system, are closely watched by Wall Street investors, other public retirement funds, and its 1.7 million retiree members.

The shift is one that Calpers has long foreseen. But it nonetheless presents a new challenge when it comes to meeting the pension fund's assumed 7.5 percent annual rate of investment return during a period of historically low interest rates.

It missed that benchmark in its most recent fiscal year, ended June 30, returning just 2.4 percent. By contrast, the S&P 500 delivered a total return of about 7.4 percent in the same 12 months, while the Barclays Capital U.S. Aggregate Index, the benchmark for bond performance, returned 1.86 percent.

While Eliopoulos says the 7.5 percent target is reasonable over a long period of time, such as 40 to 60 years, "given the current market conditions, it is a difficult high rate of return to achieve over the near term."

Eliopoulos, who said the fund was not yet committed to any specific action, said a portfolio with less volatility might include greater exposure to fixed income and real assets, but "that comes at a trade-off for expected returns."

"That’s why it’s a balancing act," he said. "Balancing the returns you can get from your equity portfolio versus your diversifying asset classes."