The California Public Employees' Retirement System said it missed its return target by a wide margin, hurt by a sluggish global economy and an under-performing private equity portfolio.Well, if you look more meaningfully at longer time horizons, Ted, why are you only telling us about 3- and 5-years, and not your 10- or 15-year record? Cherry-picking much?
The nation's largest public pension fund said its investments returned just 2.4% for its fiscal year, ended June 30, far below its 7.5% investment target.
In a conference call with reporters Monday, CalPERS' chief investment officer, Ted Eliopoulos, said the main culprit was a sluggish world economy that held down returns on its giant stock portfolio, which makes up 54% of the $301-billion fund.
The stock portfolio's return was only 1%, underperforming the 1.3% returns at its benchmark portfolio. Eliopoulos noted that the fund has done better than the 7.5% target over the previous three- and five-year periods.
“We try not to focus or get too excited about any one year's given return,” he said. “We look more meaningfully at longer time horizons.”
The system was only 77% funded as of June 30, 2014, the latest figures available.The poor performance will mean yet another increase to Encinitas' already rapidly rising pension costs. Good thing we're skimping on road maintenance!
UPDATE: It's worse than we thought.
Recently newspapers have reported that CalPERS earned 2.4% over the last twelve months and contrasted that return with its 7.5% assumed rate of return. But what those newspapers have not reported is that CalPERS needs to earn much more than 7.5% per annum for its unfunded liability not to grow.
This is because (i) under US public pension fund accounting, liabilities grow at the assumed rate of return and (ii) currently, liabilities exceed assets. That means assets have to grow faster than the assumed rate of return in order to keep up with liabilities.
As a simplified example, let’s say a public pension fund has a 77% funding ratio, which means that it has assets equal to 77% of liabilities. For greater simplicity, let’s say it has assets of $77 and liabilities of $100, and therefore an unfunded liability of $23 (100-77). Because of item (i) above, liabilities grow 7.5% per annum. That means liabilities that today equal $100 will in one year equal $107.50. For the unfunded liability not to be larger than $23 at that time, that means assets have to grow from $77 to $84.50 (107.50-84.50 = 23). That means that the pension fund needs to earn 9.7% ($77 times 1.097 = 84.50). Anything less and the unfunded liability will grow.
This is why it’s so hard for US public pension funds to catch up once they fall behind. See this relevant article from The Economist.