TRS currently uses a 7.25% assumed rate of return, which is on the higher end of investment return assumptions among major public systems.
The national average expected rate of return has fallen to 7.0% over the years, with major plans like CalPERS now lowering assumptions into the 6-7% range.
Despite SB12 (2019), with investment returns expected to underperform over the next decade relative to expectations, capping contribution rates in statute creates the perfect conditions for unfunded liabilities to keep accruing just as they have since 2001.
The CalPERS board voted Monday to select a portfolio with a return of 6.8% and an expected volatility rate of 12.1%. This expected rate of return is two-tenths of a percentage point lower than last year’s target of 7%. The vote concluded a review of the pension fund’s assets, which occurs once every four years.
This expected reduction in the rate of return means that some employees will have to contribute more to their pension funds because the fund expects to earn less from its investment portfolio.
For employees hired after the implementation of the Public Employees’ Pension Reform Act (PEPRA) in January 2013, CalPERS estimates they will contribute an average of 1.2% to 1.5% more toward their pensions. These changes will go into effect for school employees, excluding teachers, in July 2022 and will be enacted for most other local government employees in July 2023.