California Public Employees' Retirement System expects a 5.8 percent annual investment return under its new portfolio asset allocation, significantly lower than the fund's assumed rate of return of 7 percent by 2020.
The reduced expectation, disclosed late Monday in documents from the largest U.S. public pension fund, is based on a lower-risk, lower-return asset allocation adopted by CalPERS in September and announced in December.
CalPERS' caution mirrors outlooks from public pension funds across the United States as they try to grapple with investment forecasts of slow market growth over the next decade.
The new CalPERS allocation reduces the portfolio's more volatile stock and private equity sectors and increases allocations of more stable investments such as real estate and infrastructure. The board expects to review the allocation again in 2018.
In December, CalPERS staff said the fund's 10-year expected return was 6.2 percent. They expected annual returns to jump to 7.83 percent in the decades to follow. As a result, the fund's long-term average would more closely align with CalPERS's new discount rate, which the board voted in December to lower from 7.5 percent to 7 percent by 2020.
CalPERS spokeswoman Megan White told Reuters in an email on Tuesday that the 6.2 percent expectation is "more reflective of the desired allocation, and what we expect will emerge from the 1/8asset liability management 3/8 meetings over the coming year."
Pension analysts are skeptical that funds can keep generating higher returns in the long run. Most funds are cash negative, meaning they are now paying out more money to retirees than they collect from current workers and employers. Some funds, including CalPERS, say they expect higher investment returns in the decades to follow.
"It requires a rosy view of the future to assume a long-run return of 7 percent while expecting to earn only 5.8 percent in the first 10 years," said Don Boyd, fiscal studies director at the Rockefeller Institute of Government.
But the alternative, said Boyd, "would require raising government contributions by even more than they have increased already, undoubtedly an unpopular and difficult move."