Inside California’s Big Pension Plan

California has the country’s largest pension fund, the California Public Employee Retirement System (CALPERS). It’s had mediocre to poor returns for years and delivered again recently, reporting about a 1% total return for its fiscal year ending June 30. This is well below the fund’s target rate of return, which means its unfunded liability increases and employer contributions must increase. That’s a tough situation for an already cash-strapped state.

What’s more interesting is how things will develop in coming years given different investment scenarios. Pension plan trustees look at this data all the time and use it to adjust their asset allocation, among other things. Blogger Mike Shedlock does a service by presenting some charts of how CALPERS’ financial situation will develop under different investment environments. He also discusses how likely the fund is to achieve its rate of return target of 7.5%. The article is worth reading for everyone, both to understand how your own public employee pension plans work and how to apply the process to your own retirement planning.

Even if you assume negative or near-zero returns are impossible (ignoring Japan for the last 20 years and the S&P 500 since the 2000 peak) clearly low cumulative annual returns over extended periods are possible.

Given boomer demographics, downsizing, student debt suppressing housing, etc., why shouldn’t growth be anemic for quite some time?

Given that pension plans are typically heavily invested in bonds, and the current 10-year treasury rate is 1.48%, it is going to be damn difficult (most likely impossible) for pension plans to come close to the annualized projection of 7.5% made by CalPERS and others.

Furthermore, the more risk pension plans take attempting to meet near-impossible goals, the more likely it is that they will blow sky high in taking that risk.