U.S. Markets

CalSTRS unfunded liability grows under new returns expectation

(Reuters) - The California State Teachers’ Retirement System (CalSTRS) announced on Thursday that its funding level had dropped and its unfunded liability had increased, following a drop in the fund’s expected investment returns.

The public pension plan voted in February to lower its annual expected return rate from 7.5 percent to 7 percent by 2018. As a result, CalSTRS unfunded liability grew to $97 billion from $76 billion, and its funding level dropped from 68 percent to nearly 64 percent.

Across the United States, public pension plans are reviewing market forecasts of slower growth and dampened expectations of investment returns. As a result, plans are ticking down their expected return rates, or discount rates, from a median discount rate of 8 percent in 2010 to 7.5 percent presently, according to the National Association of State Retirement Administrators.

CalSTRS’s sister fund, the California Public Employees’ Retirement System (CalPERS) in December lowered its expected rate of investment return by 2020 from 7.5 percent to 7 percent, citing lower market growth forecasts over the next decade.

Lower returns over time have a compounding effect, requiring states and cities to be put more money into pension systems.

During the financial crisis in 2008 and 2009, CalSTRS, like many funds, lost about a quarter of its total value. The fund’s total portfolio currently is about $202 billion.

Reporting by Robin Respaut; Editing by David Gregorio