California Teachers' Fund May Cut Return Forecast to 7.5% Following Losses
The California State Teachers Retirement System, the second-largest U.S. public pension, will consider cutting its expected earnings rate on investments to 7.5 percent, increasing the need for higher contributions as it recovers from market losses.
The $132 billion pension fund’s governing board will consider approving a new rate of return, now 8 percent, at its Nov. 5 meeting in Sacramento, according to its agenda. The so- called assumed rate of return on investments is used to calculate the size of pension contributions from employers needed to pay retirees.
Public pension funds across the U.S. are adjusting their assumptions following losses in the recession that within three years may leave them $1 trillion short of the amount needed to pay benefits, according to a National Bureau of Economic Research report. The largest fund, the California Public Employees Retirement System, known as Calpers, uses a 7.75 percent assumed rate of return.
“The impact of reducing the assumed investment return and assumed inflation rates will result in a better representation of the fiscal condition of Calstrs benefit programs based on the current economic outlook,” the fund’s actuary Rick Reed said in a report to be presented to the board.
Calstrs, as the teachers’ fund is known, is 78 percent funded, meaning it is short by more than $42 billion. Reducing the assumed rate of return would lower that funding level to 74.2 percent, according to the report posted on the fund’s website.
The fund, which provides benefits for 848,000 public-school and community-college teachers, would need to ask lawmakers for an increase of as much as 16.8 percent in the amount the state and school districts pay toward employee retirement benefits if the board adopts the 7.5 percent assumed rate of return. Teachers are likely to be asked to pay more from their paychecks as well.
The teachers’ fund earned 12.3 percent in the year that ended in June, after losing 25 percent in fiscal 2009 and 3.7 percent in 2008.
Fewer than half of the public pension funds in the U.S. had assets to cover 80 percent of promised benefits in fiscal 2009, according to data compiled for last month’s Cities and Debt Briefing hosted by Bloomberg Link.
New York’s $124.8 billion pension fund, the nation’s third- largest, in September reduced its assumed rate of return to 7.5 percent from 8 percent. Calpers will review its 7.75 percent rate of return in February.