Pensions: CalPERs returns

Pensions & Investments reported the following regarding 2018 and prior trends:

CalPERS earned -3.9% in the year, 6.3% for the three years and 5.1% for the five years ended Dec. 31, CEO Marcie Frost told the board for the $348.7 billion pension fund at its meeting Tuesday. The 10-year return ending Dec. 31 was 7.9%.

In his first presentation to the board, newly named Chief Investment Officer Yu Ben Meng said that based on performance, CalPERS is currently 65% or 66% funded. By comparison, the Sacramento fund was an estimated 71% funded as of June 30.

So the -3.9% 2018 performance also hit the funded amount pretty hard.

I want to key in on the 10-year return of 7.9% as short term variances can always be expected. With that said, Chief Investment Officer provides some additional information:



CalPERS never fully recovered from massive losses during the financial crisis, which saw its portfolio drop in value by around 25%, but a new wrinkle is that the pension plan has dropped its expected rate of return to 7% from 7.5%. This means that municipalities must pay more in contributions to make up for the increase in unfunded liabilities from the new investment assumptions. Furthermore, CalPERS’s own investment consultants have concluded that the pension plan on average can only make slightly above 6% a year for the next decade, meaning that the system’s unfunded liability could get even worse in the next few years.

CalPERS 10-year return of 7.9% is higher than both the 7% and 7.5% returns. One might think that CalPERS is being to conservative with their 7% expectations.

However, Money and Markets adds even more context:

Stephen Jones, a financial and economic analyst who works in New York City, tracks the formulas that several market wizards have disclosed. He recently updated his numbers through Dec. 31, 2018, and shared them with me. Buffett, Shiller, and the other boldface names had nothing to do with Jones’s calculations. He crunched the financial celebrities’ formulas himself, based on their public statements. 

Shiller’s P/E10 predicts a 2.6% annualized real total return. 
Buffett’s MV/GDP says minus 2.0%. 
Tobin’s “q” ratio indicates minus 0.5% 
Jones’s Composite says minus 4.1%

It looks like there is a distinct possibility that CalPERS 7% expectations is too aggressive. If Stephen Jones' analysis proves out to be correct, California will have some tough decisions to make.