The California Public Employees’ Retirement System (Calpers) recently reported a fiscal year loss of $56 billion. The pensions of California retirees are now only 66% funded, which means they have only 66 cents in the kitty for every promised future dollar of benefits. Funding for Calpers is predicated on a 7.75% annual rate of return on investment. Of course, for the last 10 years they have fallen far short of that. They either have to increase funding—quite unpopular in this economy—or increase their investment returns. Their pension head is making a big bet. He is increasing exposure to the most risky asset classes. If it works, he will be a hero. If it doesn’t, well, he probably won’t be pension head for long. And who knows what will happen to California’s retirees, not to mention blowing an even larger hole in the already faltering state budget.
This type of investor behavior is typical of clients with a gambling mentality—maybe I can “make it back.” Suffice it to say that most investment professionals would not necessarily think this was a good idea. As always, however, most investment problems can be traced back in the end to investor behavior. I find it quite remarkable that the largest pension in the country chose as its head an individual with a background in politics-he has no background in finance. It will be interesting, and potentially tragic, to see how all of this turns out down the road.
