HomeMy WebLinkAbout07. CCCERA Investment Strategy Workshop Summary070
Central Contra Costa Sanitary District
October 26, 2015
TO: ADMINISTRATION COMMITTEE
VIA: ROGER S. BAILEY, GENERAL MANAGER 45V
FROM: DAVID HEATH, DIRECTOR OF ADMINISTRATION /J/1L/
SUBJECT: CCCERA INVESTMENT STRATEGY WORKSHOP SUMMARY
The Contra Costa County Employee Retirees' Association (CCCERA) Board recently
held a two day Investment Development Strategy Workshop on September 29th and
30th. I was able to attend portions of the CCCERA workshops and am attaching two
slides from a key handout summarizing the options considered in the final segment of
the workshop.
As you can see from the `Investment models' slide the current CCCERA policy allocates
approximately 55% of its investments to equities, 30% to bonds and 15% to primarily
real estate. The expected return from this investment allocation is 6.5% (see the first
line of the Investment model evaluation summary slide) in contrast to the current
discount rate (aka assumed rate of return) assumed by CCCERA of 7.25 %. 1 would also
direct your attention to the `% of Pay Cont. — Employer' row where the current policy
(column 1) contribution percentage is 25.9 %. If the strategy was adjusted to that of the
`Typical Peer' (column 3) the contribution rate would increase to 29.1 % or by a spread
of 3.2 %. Given the current budgeted payroll for the District of $32.7 our potential
exposure appears to be approximately $1 million of additional pension contribution
expense.
I also recently attended a presentation at the California Special Districts Association
(CSDA) conference in September which was moderated by the Chief Financial Officer
of CalPERS. She shared that CalPERS is giving serious consideration to adjusting its
current discount rate of 7.5% downward to the 6 -6.5% range. I've also attached an
article published in the Sacramento Bee on October 12th relative to the CalPERS Board
considering a new investment policy.
The CCCERA Board will not consider potential action on changing its asset allocation
until November at the earliest and more likely in December based on the discussion
which took place at the end of the recent workshop.
Attached Supporting Documents:
1. CCCERA slides
2. October 12, 2015 Sacramento Bee article
Investment models
Policy
Current
Typical Peer
80/20
Equities 55
53.6
50
80
US Large
International
Developed
Emerging Markets
Global Equity
42.6
45.7
45
Private Equity
12.4
7.9
5
Fixed Income
31.2
31.1
35
Cash
0.5
0.6
40
US TIPS
1.3
2.3
17.5
US Treasury
15
13.5
Short -Term
5
4
Gov't /Credit
60
Global Sovereign ex US
1.25
1.4
5
Core Fixed Income
19.5
19.1
35
High Yield Corp. Credit
7.4
6.5
15
Global Credit
1.25
1.2
Emerging Markets
5
5
Debt (Local)
5
5
Private Credit
5
5
Other
13.8
15.3
15
Commodities
1.3
2.3
5
Hedge Funds
5
5
Core Real Estate
8
9.4
5
REITs
4.5
3.6
100
Total
100
100
100
Typical peer is based on BNY
Mellon universe data of DB Plans > $2 Billion
80
20
20
0
100
70/30
60/40
Risk
Risk
Diversified
Diversified
50/25/25
40/30/30
70
60
50
40
20
17.5
15
13.5
5
4
70
60
10
5
30
40
25
30
10
15
30
40
5
5
5
5
5
5
0
0
25
30
5
5
5
20
20
100
100
100
100
FFP
40
10
10
5
15
35
5
10
10
10
25
10
15
100
ATTACHMENT 1
777 Strategy Evaluation 12
Verus -
Investment model evaluation summary
Investment Models
Selection Criteria Policy
Expected Return
6.5%
Volatility
11.6%
Sharpe Ratio
0.38
% chance of meeting 7.25%
41%
Daily VaR (95% confidence, $MM)
$69.0
Daily CVaR (95% confidence, $MM)
$112.0
2007 -2009 Drawdown (Simulation)
-36.0%
1 st Percentile (I Year, MVA)
-28.7%
Potential impact on Discount Rate
Other Key Metrics
-0.74%
(Expected Yr. 1
Funded Ratio
96.8
$MM Contributions - Employer
$196.4
% of Pay Cont. - Employer
Risk Factors
24.6
Portfolio Complexity
med
Leverage
med
Peer /Headline Risk
low
Liquidity Risk
med
Tail Risk
high
Equity Risk Allocation
high
Verus'' 7
Risk - Balanced Risk- Balanced
Current Typical Peer 80/20 70/30 60/40 (50/25/25) (40/30/30) FFP
6.4%
6.0%
6.9%
6.5%
6.0%
7.1%
6.6%
6.6%
11.1%
9.6%
13.2%
11.5%
9.9%
11.0%
9.7%
9.5%
0.39
0.41
0.37
0.38
0.40
0.45
0.46
0.48
40%
35%
45%
41%
35%
47%
40%
40%
$72.6
$69.6
$110.4
$95.0
$79.8
$60.1
$57.7
$43.1
$112.7
$102.3
$149.0
$131.9
$114.7
$97.9
$92.0
$84.4
-35.8%
-30.4%
-38.5%
-38.0%
-32.6%
-36.3%
-33.0%
-28.8%
-28.5%
-23.3%
-33.0%
-28.6%
-24.4%
-27.2%
-24.1%
-22.2%
-0.87%
-1.26%
-0.32%
-0.77%
-1.22%
-0.14%
-0.67%
-0.62%
95.9
93.8
99.4
96.6
94.0
100.3
96.9
97.3
$205.6
$230.1
$137.0
$197.8
$228.0
$121.2
$193.5
$194.5
25.9
29.1
17.5
25.0
28.9
15.0
24.5
24.6
med
med
low
low
low
med
med
med
med
low
low
low
low
med
med
med
low
low
high
high
high
med
med
high
med
med
med
med
low
med
med
low
high
med
high
high
med
high
low
low
high
high
high
high
high
med
low
med
Strategy Evaluation
23
ATTACHMENT 2
By Dale Kasler
dkasler0sacbee.com
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CalPERS is about to roll out an unusual new investment policy that could reduce risks but also lower
its portfolio's profitability.
The new policy, to be discussed next week by members of CaIPERS' governing board, could prove
controversial. Reducing profits could prompt the California Public Employees' Retirement System to
once again impose higher contribution rates on the state and on local governments.
CalPERS staff, in a report released Monday, said the new plan is designed to shore up the pension
fund's long -term financial stability even if it sacrifices some short-term profits.
The CalPERS board is considering the new "funding risk mitigation policy" at the same time
CaISTRS, the teachers' pension plan, is undergoing its own long -term analysis of how to reduce risk
and volatility.
The proposed strategy at CalPERS, which controls $294.9 billion in assets and is one of the world's
most influential pension funds, caps more than a year of internal discussion on how to deal with
increasingly volatile financial markets. It revolves around the CalPERS "discount rate," the pension
fund's official forecast of annual investment returns, and is based on the idea that a year of very
strong investment performance can often be followed by a difficult year.
Under the policy, CalPERS would reduce its discount rate, currently at 7.5 percent, when its most
recent annual investment returns exceed the discount rate by a certain percentage. For instance, the
rate would drop by 0.05 percent if CalPERS racks up investment profits that exceed the current rate
by 4 percentage points. Stronger years would trigger bigger declines in the discount rate.
The pension fund would then adjust its portfolio accordingly, pushing more dollars into safer
investments, which would be expected to generate lower returns. The staff report doesn't outline
which investments would be emphasized under the new plan.
The plan "establishes a mechanism whereby CalPERS investment performance that significantly
outperforms the discount rate triggers adjustments to the discount rate, expected investment return,
and strategic asset allocation targets," according to the staff report, submitted to the CalPERS
board's finance and administration committee for a meeting next Tuesday. "Reducing the volatility of
investment returns will increase the long -term sustainability of CalPERS pension benefits for
members."
Pension experts said the mechanism is unusual, if not unprecedented, but could make sense at a
time when many pension funds are acknowledging that it's difficult to maintain aggressive
investment strategies. Keith Brainard, research director at the National Association of State
Retirement Administrators, said public pension funds have been criticized for refusing to bank their
profits and dial back risks.
"Some of those gains could have been booked," Brainard said. The proposed CalPERS policy
"seems consistent with the notion of taking gains when markets are strong, (in order) to reduce risk
going forward," he said.
CalPERS earned just 2.4 percent on its investments in its most recent fiscal year, well below the 7.5
percent forecast, in large part because of disappointing returns in the stock market. The portfolio
earned 18 percent the year before. CalPERS has said it has earned an average of nearly 11 percent
a year for the past five years.
Already, CalPERS has been phasing in higher pension contributions. The rate hikes are designed to
make up for the multbillion- dollar investment losses suffered in 2008 and cover rising pension
expenses stemming from larger government payrolls and predictions that retirees will live longer.
When fully phased in, the moves will cost state and local taxpayers about $600 million a year.
The CalPERS system is 77 percent funded, meaning it has 77 percent in assets for every dollar of
long -term obligations. Some pension experts say 80 percent funding is acceptable, while others say
pension systems should be fully funded to be considered financially sound.
Dale Kasler: 916 - 321 -1066, ®dakasler
Read more here: http: / /www.sacbee.com/ news / business/ artic /e38834613.htm/ #storylink =cpy