A new policy aimed at cutting risk from the California Public Employees Retirement System (CalPERS) investment portfolio will take years to implement, leaving the largest U.S. public pension fund vulnerable to a sharp fall in asset performance in the short-term, Moody's said.
In November, CalPERS adopted a policy to gradually reduce the amount it expects to bring in through its investments, a controversial move because lower returns must be offset by higher contributions from the state's cities and workers, some of which are still struggling to recover from the 2008 financial crisis.
CalPERS said the step was taken in response to maturing plan demographics.
Moody's said it approves of Calpers risk-reducing policy, saying it is credit-positive for California and local governments in the state.
"Due to the gradual and contingent nature of the plan, however, sharp asset declines could very well materialize before its implementation, meaning substantial fiscal risk to California governments from CalPERS pension asset performance remains," Moody's said.
Moody's also noted that while the move toward lower risk is a positive step, the changes still lag risk-reducing efforts undertaken in the private sector.
"Many corporations have either transitioned to defined contribution plans, or have defined benefit pensions with fewer volatile investments and far lower discount rates," Moody's said.
CalPERS spokesman Joe DeAnda said the pension fund is pleased that Moody's views the new policy as slightly credit positive.
"We remain acutely aware that many municipalities remain sensitive to contribution rate increases, and this was something well and thoroughly discussed and considered as the policy was developed and adopted," he said.
He said the policy will help CalPERS' partner agencies by reducing contribution rate volatility and risk over time.
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