The California pension system (CALPERS) is an enormous fund of $238 billion. Yesterday, the consulting actuaries for the fund recommended lowering the total return assumption to 7.25% from 7.75%, last set in 2004. Prior to 2004, the return assumption was 8.25%.
While individual investors do not have the same constraints of such a large fund, this recommendation should be taken on board as further confirmation that expectations must be moderated from long-held assumptions from decades past.
The return assumption change will increase the funding requirements for the fund, which translates to higher operating costs for the state, and an incremental reduction in the credit quality of the state.
According to CALPERS, the liabilities are 75% funded at this time, but Stanford University researchers, according to Bloomberg, believe that a 6.2% return is more realistic, which translates to 58% funding of liabilities.