The California public employee and teacher pension funds both posted small annual returns this week and might call for higher contributions.
The California Public Employees' Retirement System (CalPERS) and the California State Teachers' Retirement System (CalSTRS), the two biggest public pension funds in the US, reported returns of 1% and 1.8% respectively for the last fiscal year.
The dismal returns might mean that local governments and school districts may have to contribute more toward their workers' retirements.
California Public Employees' Retirement System
CalPERS' 1% return on investments was below the 1.7% benchmark the scheme had set itself. It was also below the target for the scheme's long-term growth strategy of a 7.5% average annual rate, a target needed in order to pay for retirement benefits for more than its 1.6 million members.
Joseph Dear, CalPERS' CIO said that the last 12 months had been a "challenging period for all investors" and that the ongoing European debt crisis, in combination with slowing global economic growth, had increased market volatility and seen to it that equity returns were lower than expected.
The small gain – despite continued volatility in world markets and economies – was helped by the performance of CalPERS real estate, which delivered a 15.9% return, outperforming the pension fund's real estate benchmark by more than 3%. But counterbalancing that was the negatively impact of large allocations to US and international public equities.
Dear warned that the performance of the $234.3bn scheme should be seen as "a clear reminder that [the scheme] must remain focused on performance, risk and internal controls in today's financial environment".
California State Teachers' Retirement System
CalSTRS' 1.8% return rate is also below the annual average rate of 7.5% and 150 basis points below the fund's policy benchmark. The investment portfolio of the scheme at the end of the fiscal year had a market value of $150.6bn.
However, the situation is not as bad as with CalPERS as the scheme's three-year return remains a solid 12% after two very strong years. In the 2010-11 fiscal year, CalSTRS posted a 23.1% investment return, preceded by a fiscal year 2009-10 return of 12.2%.
The teachers' fund did lose 3.1% in its global stocks portfolio this year, which makes up about half of its total investments. Real estate, again, showed a gain of 9.2%, while private equity investments showed returns of 5.9% and fixed-income bonds were up 7.3%.
"A year like this one underscores the wisdom of viewing CalSTRS' performance in the long term and refraining from using one given year's performance as the gauge for how well the fund is doing," said CalSTRS' CEO Jack Ehnes. "It also emphasizes the fact that investment returns alone cannot place the scheme on a solid financial footing. It's clear that the Legislature and Governor must implement a long-term funding plan that includes gradual, predictable and fair contribution increases for all parties involved."
Unlike most public pension plans, the scheme cannot set its own contribution rates and requires the government to put through any changes.
First published 17.07.2012
azeevalkink@wilmington.co.uk
