SAN FRANCISCO (Reuters) - California Public Employees’ Retirement System Chief Investment Officer Ted Eliopoulos on Monday described the pension fund’s current fiscal year performance as “likely to be flat, which is a nice way of saying zero.”
CalPERS, the biggest U.S. public pension fund, plans to announce its annual returns for the 12 months ending June 30 in mid-July.
On Monday, Eliopoulos warned CalPERS Investment Committee that the coming three to five years will be “a challenging market environment for us.”
“It is going to test us,” he said at the board meeting.
CalPERS lowered its performance expectations in each major asset class.
The fund’s primary pension consultant, Wilshire Associates, predicted that the total fund, estimated to be worth $293.6 billion, will return 6.4 percent annually over the next decade, reduced from a 2013 forecast of 7.1 percent.
Last fiscal year, CalPERS returned 2.4 percent on its total portfolio, slightly underperfoming its benchmark and marking a significant decline from previous years when the fund earned returns of over 10 percent.
CalPERS has been working to recast investment priorities to slash complexity and volatility. Last year, the pension fund began projecting a negative cash flow, meaning the fund pays out more in benefits than it collects from contributions and investment income, a repercussion of more baby boomers retiring.
Across the country, public pension funds are tackling similar problems as the cities, counties and states that run them struggle to keep up with mandated contributions. Adding to the challenges, most retirement systems are underfunded, and investment returns have been choppy.
Wilshire’s largest cuts to forecasts for CalPERS’ annual returns were in global equity, reduced to 6.7 percent from 7.75 percent, and private equity, which it cut to 9.4 percent from 10.45 percent.
CalPERS reaffirmed its support for private equity, a high-performing asset class but one that’s faced scrutiny in recent years for its high fees and lack of transparency.
“I think it’s imperative to include this asset class,” said Board Member Dana Hollinger of private equity. “While it’s not perfect, it is part of that equation. Net of fees it is still our best performing asset class by a significant margin.”
Reporting by Robin Respaut; Editing by Richard Chang and Alden Bentley