CalPERS board OKs lowering assumed rate of return to 7.5% Bowing to the realities of a volatile stock market and a weak investment climate, the nation's largest public pension fund lowered its benchmark assumed rate of return. The board of the California Public Employees' Retirement System voted 9 to 1 to reduce its expected, average annual return on its investments to 7.5% from 7.75%. That was a quarter of a percentage point higher than what had been recommended by CalPERS' chief actuary, Alan Milligan. In addition to lowering the assumed rate of return, which had been previously approved by a CalPERS committee, the board also agreed to reduce its assumed average annual inflation rate to 2.75% from 3%. The changes, which kick in for the state government and school districts July 1, will cost the state general fund $167 million in higher pension costs in the next budget year. School districts' bill for non-teaching staff retirements will increase $137 million. Those costs will increase July 1, 2013. The CalPERS board, wary of that effect, directed the pension fund's staff to consider ways to slow or otherwise mitigate a dramatic boost in local government pension costs. The $240-billion CalPERS fund has used the 7.75% assumed rate of return for more than a decade and over that time has exceeded the benchmark, on average. CalPERS' annual return averaged 5.4% for the 10 years that ended June 30, 2011, and the five-year annual return was 3.4%. However, the volatile fund earned a whopping 21.7% return in the last fiscal year.