SAN FRANCISCO, Nov 18 (Reuters) - California Public Employees' Retirement System on Wednesday adopted a policy to gradually reduce the amount that the pension fund expects from its investments, a decision that came under fire from California's governor for not going far enough.
The move by the nation's largest public pension fund is controversial because lower investment returns must be offset by higher contributions from the state's cities and public workers.
Calpers will reduce its expected rate of investment returns in years after the fund outperforms its 7.5 percent target by 4 percentage points. The goal is to ultimately reduce the rate to 6.5 percent, although that could take decades under the new policy.
Rob Feckner, president of the Calpers board of administration, said the policy "makes significant strides in lowering risk and volatility in the system, and helps lessen the impacts of another financial downturn."
But Governor Jerry Brown, a proponent of a sharper reduction in the expected rate of return, was quick to criticize the move, arguing the pension fund should move faster to cut risk from its portfolio.
"I am deeply disappointed that the CalPERS Board reversed course and adopted an irresponsible plan that will only keep the system dependent on unrealistic investment returns," Brown said in a statement on Wednesday. "This approach will expose the fund to an unacceptable level of risk in the coming years."
Calpers, whose total assets are now approximately $300 billion, lost roughly 39 percent of its value during the 2008 financial crisis.
Jeff Snyder, a New York-based consultant at Cammack Retirement Group, said there is a national trend by pensions funds to remove risk from investment portfolios by ridding themselves of private equity and hedge fund holdings that could come at a cost to funds if the market surges.
"By reducing to lower risk, you protect the portfolio from downside but you're also going to prevent upside potential," he said.
In July, CalPers announced that after years of steady returns it missed the 7.5 percent target, returning just 2.4 percent for the fiscal year ended June 30.
Calpers is expected to have a negative cash flow - meaning it will be paying out more in benefits than it receives in contributions - for at least the next 15 years, mostly due to a maturing workforce.
CalPers paid $18 billion in pension benefits in the 2014-2015 fiscal year, compared to $13 billion in contributions.
Reporting by Rory Carroll, additional reporting by Robin Respaut; Editing by Bernard Orr