CalSTRS Lowers Investment Return Assumption
Move is part of a larger experience study updating assumptions to June 30, 2011

News release Ricardo Duran

WEST SACRAMENTO, CA – The governing board of the California State Teachers’ Retirement System (CalSTRS) today adopted a new set of actuarial assumptions, including lowering the investment return assumption from 7.75 percent to 7.5 percent. The change is part of a four-year experience analysis that sets the parameters for determining the financial health of the system.

The assumptions update the actuarial experience analysis covering 2006 through 2010 and are used to evaluate the impact of both demographic and economic factors on the long-range financial health of CalSTRS. These assumptions, in turn, have a significant impact on the valuation of the plan, a snapshot of its financial health, scheduled to come before the Teachers’ Retirement Board in April.

The most recent past valuation, presented in April 2011, showed a $56 billion funding shortfall, meaning that available assets fell $56 billion short of the system’s long-term obligations.

“Any funding plan the Legislature and Administration develops for CalSTRS should reflect the most realistic expectations for the future, in order to effectively plan for the payment of CalSTRS benefits to its members,” said Teachers’ Retirement Board chair Dana Dillon. “We have to keep in mind that CalSTRS cannot set its own contribution rates – only the Legislature and Governor have the authority to do so. Also, teachers do not receive Social Security for their CalSTRS covered employment, so the defined benefit pension may be their only source of retirement security.”

The current experience analysis contains three significant recommended changes to CalSTRS assumptions:

  • Lowering the investment return assumption from 7.75 percent to 7.5 percent annually.
  • Changing the mortality assumption to reflect the fact that members are living longer.
  • Lowering the assumption of wage growth from 4 percent to 3.75 percent annually.

“Of these, the most significant change is the investment return assumption, because the projected lower future returns makes it much more likely that we cannot invest our way to financial health. We’re still feeling the effects of the global financial crisis,” said CalSTRS CEO Jack Ehnes.

During the crisis, the CalSTRS portfolio shed $43.4 billion between July 1, 2008 and June 30, 2009. Since CalSTRS uses an averaging, or smoothing, process that recognizes gains and losses over a three-year period, this is the final year in which the negative impacts from the crisis are being felt.

The California State Teachers’ Retirement System, with a portfolio valued at $144.8 billion as of December 31, 2011, is the largest teacher pension fund and second largest public pension fund in the United States. CalSTRS administers a hybrid retirement system, consisting of a traditional defined benefit, cash balance and defined contribution plan, as well as disability and survivor benefits. CalSTRS serves California’s 856,000 public school educators and their families from the state’s 1,600 school districts, county offices of education and community college districts.