Call it an information and listening tour where one comment and concern rose above all others: Will the CalPERS fund be there to pay the benefits I’ve earned when I retire?
The short answer: We’ll be there—today, tomorrow, and for years to come. But that response deserves a more complete explanation.
I understand why the question comes up. The news about pensions can sometimes seem gloomy. We have about 71 percent of the assets we need to pay the benefits that have been promised, and that number has to get higher. In a time of volatile financial markets, we also have a goal of earning 7 percent on our investments over the long term. And though we just reported earnings of 8.6 percent for fiscal year 2017-18, continued successful investing will require new and creative thinking on our part.
Meanwhile, public agencies that contract with CalPERS to administer their pension plans have been clear about the budgetary issues they face as contribution costs increase.
Yes, the challenges and criticisms may appear daunting. Here’s what we’re doing to tackle them.
We reduced what we expect to earn on investments.
After financial experts almost universally told us we would see lower returns over the next 10 years, we cut our expectations. We know that means public agencies, school districts, and special districts must pay more, and we’re working to make sure they have all the information they need to properly plan for the future. But the increased contributions also mean that our cash flow is positive and much stronger—the additional money helps offset growing pension payments. In addition, the State of California is making an additional $6 billion payment to reduce its unfunded liability. That too strengthens the fund.
We cut the amortization period.
It’s a little like your mortgage. If you pay it off quicker, you end up owing a lot less in interest and saving money. We shortened the time period public agencies have to pay off their unfunded actuarial liability, beginning in 2019. Annual contributions tick up very slightly, but the overall long-term savings for all our partners are likely in the many millions. This is a meaningful change, in line with industry best practices, and it strengthens our fund by greatly reducing the probability of our funding status falling to a level that would be difficult to climb up from.
We’re exploring new models that can potentially increase our private equity returns.
Private equity is our highest returning asset class, averaging 10.6 percent over the past 20 years. But with a $355 billion portfolio, investing in funds within the private equity market isn’t enough. We need a forward-looking program to help achieve our 7 percent return target and hit our goal of investing 10 percent of our fund into private equity. That requires new thinking.
Part of our plan, which will undergo additional evaluation before the CalPERS Board decides whether to adopt it, includes an investment program called CalPERS Direct. One part of CalPERS Direct would be dedicated to investing in promising companies in life sciences, health care, and biotechnology. The other part would take material stakes in more traditional companies.
Why take this approach? The competition to fund high-quality investments is fierce. The number of private companies going public has sharply declined over the past 20 years, while more investors than ever are seeking private equity deals. The independent structure of CalPERS Direct would enable us to better source and more directly take advantage of opportunities that we believe can drive returns higher.
We also think we’ll save some money over time. We’ve had strong success with private equity, but its fees and expenses are higher than other asset classes. This model will help move us away from paying some asset-based fees while achieving economies of scale. Ultimately, we’ll be able to keep more money in the fund.
We’re working closely with our stakeholders and talking directly with our members.
I regularly urge employers, labor representatives, retiree groups, and legislative leaders to come to our board meetings and tell us what’s on their minds. We strive to be a reliable partner, ready to discuss the issues at any time.
I’m taking our message of outreach and information to our members as well. Over the summer, I spoke to many of those attending CalPERS Benefits Education Events in Riverside, San Diego, and Garden Grove. I told them how we’re focused on boosting our total returns, since 61 cents of every dollar we pay in pension benefits comes from investments. Increasing that number will help take some financial pressure off employers and employees alike.
And it will help ensure that we’re here when you finally make that call and tell us you’re ready to retire.
Our stakeholders have told us they welcome our outreach efforts—here are a couple of comments they’ve shared with us.
We appreciate the leadership of CalPERS. They have developed a partnership with the California State Retirees, working together to meet the challenges ahead affecting our pension and health care benefits.
Tim Behrens, president of California State Retirees
It’s no secret that public agencies are facing challenges with respect to growing pension obligations, but it’s valuable to know that our districts aren’t facing these challenges on their own. CalPERS continues to demonstrate their dedication as a partner that provides information, education, training, and assistance to special districts throughout the state as they work to address pension obligations in a fiscally responsible manner.
Neil McCormick, CEO of the California Special Districts Association