CalSTRS has taken the first big step toward reducing risk in its portfolio by adopting a "risk mitigation strategy" that will devote a portion of its assets to safer investments.
The move by the teachers pension fund comes as California's largest public pension fund, CalPERS, considers its own plan to lower its risk profile. Both pension funds are wrestling with long-term funding deficits and earned returns of less than 5 percent each in the most recent fiscal year. At the same time, they're determined to minimize the fallout from a market meltdown like they experienced in 2008.
CalSTRS' investment committee approved the new guidelines at its meeting Wednesday. Because the investment panel is a "committee of the whole," including all of the members of the pension fund's governing board, there's no need for the full board to vote on it.
The committee voted to shift 9 percent of CalSTRS' total fund toward lower-risk investments such as stable, long-term Treasury securities, and away from more volatile investments such as stocks. With the CalSTRS portfolio pegged at $181.3 billion as of the end of September, that would represent about $16.3 billion being moved.
In a down market, the move would reduce CalSTRS' losses by an estimated $2.5 billion, according to a staff report submitted to the investment committee. But the shift would cost CalSTRS money in good years because profits would be reduced.
"You're sacrificing a little bit of performance in up markets for protection in down markets," said Ricardo Duran, spokesman for the California State Teachers' Retirement System.
CalSTRS and other public pensions are sensitive about lowering risk because it generally means lower returns, potentially putting more of a burden on taxpayers to fund employee retirements. As it is, the Legislature last year OK'd significant increases in pension contributions to CalSTRS from the state, school districts and teachers in order to gradually erase a $70 billion long-term funding gap.
But after losing billions during the 2008 market crash and struggling ever since, CalSTRS decided it was time to reduce volatility.
CalSTRS won't decide until February what sort of investments will go into the 9 percent risk mitigation segment of its portfolio, and it will probably take years to complete the shift.
"We try to make our shifts on an opportunistic basis, as opportunities pop up," Duran said.
The California Public Employees' Retirement System, or CalPERS, is contemplating a plan to reduce its discount rate whenever it has an exceptionally strong year, on the theory that good years are often followed by bad years. Lowering the discount rate, which is currently 7.5 percent, would steer CalPERS toward a more conservative portfolio. The discount rate serves as a kind of official forecast of annual returns.
Gov. Jerry Brown's administration has urged CalPERS to reduce risk more quickly by cutting the fund's discount rate to 6.5 percent in five years. The CalPERS board is expected to vote on the strategy later this month or in December.
(c)2015 The Sacramento Bee (Sacramento, Calif.)