Largest US pension fund Calpers considers more than doubling bond allocation to 44%

[LOS ANGELES] - The California Public Employees' Retirement System, the largest US pension fund, is considering more than doubling its bond allocation to reduce risk and volatility as the stock bull market approaches nine years.

Calpers is looking at a menu of options for its fixed-income target ranging from the current 19 per cent to as much as 44 per cent, according to a presentation for a board workshop. Equities could be cut to as little as 34 per cent from 50 per cent.

Stocks were the best-performing asset class in fiscal 2017, returning almost 20 per cent.

"The markets have had a pretty good run and it's possible Calpers staff is thinking this might be a good time to lock in some of the gains," Keith Brainard, research director for the National Association of State Retirement Administrators, said in a phone interview.

Calpers oversaw US$342.5 billion in assets as of Nov 10, up about 13 per cent this calendar year on a combination of returns and contributions from employees and taxpayers. The fund lost money in past bear markets, including about 25 per cent in the 12 months through June 2009 and 7 per cent in fiscal 2001.

Bond yields remain at low levels because of persistent weak inflation, central bank easy money policies and global investors chasing income. Raising the allocation would reduce the fund's discount rate, or average expected return, to 6.5 per cent from the 7 per cent annual target adopted last year. A lower target would probably require bigger contributions from taxpayers and public agencies to cover pension obligations, a shift that board member JJ Jelincic said he would oppose.

"We've cut the return expectation to the point that employers are screaming, 'We can't afford it. We can't afford it,' " Jelincic said. "I personally would be willing to take on a little more risk."

The average allocation for public pensions is about 23 per cent to fixed income and 49 per cent to stocks, according to Nasra data.

"We consider any of those portfolio mixes to be implementable and potentially prudent portfolios, although they're not necessarily all we would say equally advisable given the externalities," Eric Baggesen, managing investment director, told the board on Monday, referring to the potential impact of altering the target return.

An allocation of 28 per cent to fixed income and 50 per cent to equities would allow the board to retain its current long-term return target, Baggesen said.

The Calpers board is scheduled to vote on the allocation in December. Almost all of the fixed-income and stock holdings are managed in-house while more complex assets, such as private equity and real estate, are overseen by outside consultants. Allocations to private equity and real assets would stay at 8 per cent and 13 per cent, respectively, under all scenarios under consideration.

The allocation revisions occur every four years. Calpers is working to provide for a growing wave of longer-living retirees.

BLOOMBERG