Stock market drives gains for CalPERS public pension fund

Riding a stock market surge, CalPERS on Monday reported a 21.3% return on its investments over the last fiscal year, reaching a record high-value of $469 billion.

The return represents a sharp turnaround from the early days of the coronavirus pandemic, when the fund’s value plunged by tens of billions of dollars before rebounding.

Altogether, CalPERS’ portfolio gained $80 billion over the past 12 months, the California Public Employees’ Retirement System announced in a news release.

The return far exceeds the fund’s 7% annual target, which CalPERS must hit to fund pensions for about 2 million California public employees and retirees. The high rate represents a major improvement over below-target returns of the last two years.

“It is obviously very good news, and we congratulate CalPERS and its investment staff on a very good year.”” said Ted Toppin, chairman of Californians for Retirement Security. The group represents public employee unions and retirees.

“But for us it important not to get too excited in good years or too down in years with losses or lower returns,” Toppin said. “It’s very important to remember that CalPERS is long-term investor. Their performance horizon is measured in decades, not single years.”

The retirement system remains underfunded, but the year’s return improved its long-term status, according to a CalPERS news release.

A year ago, CalPERS had about 71% of the assets it would need to cover all its long-term debts. The funded percentage is now 82%, according to the release.

California public employees to pay more

The high return triggers automatic changes under a new risk mitigation policy. The policy aims to force the retirement system to use short-term gains to reduce risks by shifting assets into less volatile categories of investments.

The 2015 policy, activated for the first time, causes CalPERS to reduce its annual investment target to 6.8% from 7%.

A reduction to the rate CalPERS expects to earn from its portfolio typically forces cities and other government agencies to pay more now to fund retirement plans for their workers.

But CalPERS CEO Marcie Frost told the fund’s board of directors Monday that the large return would shield public employers from rate increases related to the system’s long-term debts.

Still, local government employees hired after 2013 will have to contribute more toward their pensions as a result of the change, Frost told the board.

CalPERS last month estimated that public employees would have to contribute a half-percent more of their pay due to risk mitigation, according to a slideshow it presented to government employers.

Employees must split annual pension contributions with their employers under the 2013 Public Employees’ Pension Reform Act. When required contributions go up, employees’ share goes up.

The requirement affects local government employees directly. State government employee unions face pressure to pay more in collective bargaining when the state’s pension costs go up.

Stocks, private equity drove gains

CalPERS is in the process of making a periodic adjustment to its investment strategies, weighing more risk and new investments in private equity and direct lending.

Last year’s high return was driven by a 43.8% gain in private equity investments and a 36.3% gain in stocks, according to the news release.

CalPERS investment officials have emphasized that the kinds of gains the system made last year aren’t likely to be repeated. The prices of stocks, real estate and other assets are high right now, leaving less room for growth.

“As pleased as we are with these great returns, let me emphasize that we don’t count on this kind of investing environment every year,” CalPERS investment committee chairwoman Theresa Taylor said in the news release. “We know markets go up and down. As a long-term investor, our job is to make sure we have a carefully considered plan to strengthen our fund no matter the economic climate so that we can pay the benefits our members have earned.”