Many who watch public and private pension systems warn that difficult times are ahead. They of course have a number of reasons. The main problem they point out is that defined benefit plans like the ones the city and county of San Diego have aren’t collecting nearly enough money to pay what they will eventually owe to retired employees.
Another problem, they say, is that these pension systems rely too heavily on the investment market. They should force employees to pay more not just hope that the stock market will earn more than is realistic.
And so we get to the San Diego County Employees’ Retirement Association. Tomorrow, that group will hear a discussion and possibly act on its actuary’s long-standing advice to lower the amount of return it expects to earn on investments. Right now, SDCERA calculates everything it does based on the assumption that it will make 8.25 percent. Advisors have said that should probably be lowered to at most 8 percent to conform to realistic expectations of what a trust can legitimately expect to earn guaranteed over a long term.
The problem is, if they lower the assumed rate of return, as it’s called, they’ll have to look fresh at the books. That will show they have a bigger deficit in the pension system than they had. They usually err on the side of doing whatever it takes not to let something like that happen.
Last year, the trustees resisted claiming they have a special system of investing called the “alpha engine” that gives them more investment success than all of us Joe Lunchboxes.
I listened to an hour-long presentation on the alpha-engine one time and really tried to pay attention, but I was lost. I do know that I instinctively furrow my brow when I hear someone say that they can beat the market with some kind of clever new investment scheme.
Watch for the group to again object to the assertion that it lower the assumed rate of investment return. Why play it conservatively?