The funding level of the California Public Employees' Retirement System pension fund dropped 3 percent for the fiscal year ending June 2015, according to its recently released annual report.
The funding status of the country's largest public pension fund is now 73.3 percent. The report puts the fund's total value at $301 billion.
Overall, the fund returned 2.4 percent for the latest fiscal year, the result of "tepid global economic growth and increased short- term market volatility," the report said.
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The strengthening U.S. dollar also negatively impacted returns in international equities.
CalPERS' actuaries assume a 7.5 percent annual return.
While last year's return was down from previous years, the fund has posted a three-year return of 10.9 percent, and a five-year return of 10.7 percent, both marks exceeding trustees' benchmarks.
For the first time in the fund's history, retirement benefits paid out exceeded the amount of contributions.
Like many pension funds across the country, CalPERS is facing demographic headwinds.
There are now 1.3 participants contributing to the fund for every retiree. The ratio was two active participants for every one retiree 10 years ago. The fund has obligations to more than 1.2 million active and inactive participants.
Trustees expect that downward trend to continue for the next 20 years, when the ratio of active participants to retirees is expected to be less than one, according to the report.
Last fiscal year saw a 13 percent increase in retirements from the previous year, reflecting the nation-wide trend of an aging workforce.
In response to those demographic realities, the retirement fund has implemented a new Funding Risk Mitigation Policy, adopted in November 2015.
The core strategy is to lower the fund's discount rate after strong returns can be captured, explained CalPERS' CEO Anne Stausboll in the report.
Ultimately, that is expected to reduce the unfunded liability and lower the volatility of investment returns, wrote Stausboll.
Investments in Real Assets, including income-generating real estate investments, accounted for 11 percent of the fund's allocation, and provided the strongest returns, yielding 12.4 percent.
The fund was able to cut $217 million in costs, in part by eliminating its hedge fund portfolio, and more aggressively negotiating management fees, said Ted Eliopoulos, CalPERS' chief investment officer.
CalPERS uses about 200 external managers, but expects to cut that number in half by 2020.
With fewer advisors managing larger asset pools, trustees expect to have more negotiating power over fees going forward.
Just over half of the fund, or about $153 billion, is held in global equities, which returned 1 percent for the year.
About $28.8 billion, or 9.6 percent of the fund, is invested in private equity, which returned 8.9 percent. The report said it expects to increase the allocation to 10 percent.
The fund owns about $2.2 billion Apple stock, and more than $1 billion in Exxon Mobile shares, the two largest public equity holdings in terms of value.
For the fiscal year ending June 2007, CalPERS funded ratio was 101.2 percent.
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Nick Thornton
Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.
