California Dreamin'

For a truly outstanding example of wishful thinking, check out this article on pension fund behemoth Calpers. Faced with pathetic returns on its investments, the California fund appears poised to do what many other pension funds have already (grudgingly) done: lower the expected rate of return it receives on its investments.

Despite record-low interest rates, the median state pension plan in the U.S. still assumes an annual rate of return near 8%, which is a bit like the median American housewife assuming a date with George Clooney; it ain’t gonna happen.

So, ever so slightly, public pension plans have been trimming their expected rates of return. Calpers’s pension and health benefits committee has recommended an assumed annual rate of 7.5% -- just a smidgen below its current level of 7.75%.

And how, you might ask, does that compare to Calpers’s actual rate of return?

For the year ended Dec. 31, Calpers earned a whopping return of just 1.1%.

Nevertheless, Calpers’s chief actuary said the 7.5% rate was prudent, and said Calpers has a 50-50 chance of meeting that goal.

Right.

So years from now, if there is a gigantic shortfall in California’s pension funds and retirees go begging, many excuses will be offered - but remember: it all started with wishful thinking.

Of Course We Gave Them a Good Rating...

The nation's biggest public pension fund has now filed suit in California over $1 billion in losses it claims were caused by "wildly inaccurate" credit ratings.

The California pension fund, known as Calpers, says that highly complicated structured investment products that had been given a AAA rating are now worthless.

Calpers contends that in giving these securities their highest credit rating, the three top ratings agencies -- Moody's Investors Service, Standard & Poor's and Fitch -- "made negligent misrepresentation" to the fund.

Moreover, Calpers, in its suit, cites conflicts of interest by the agencies that rated these securities. Not only were they paid by the companies issuing the securities, it says; but they went one step further: All three agencies received lucrative fees for helping to structure the deals -- and then issued ratings on the deals they helped create.

Nice work if you can get it, right?

We'll see what the agencies have to say for themselves (the New York Times said that they either did not respond to request for comment or said they could not comment).

But in the meantime, the folks at Calpers -- and the credit rating agencies -- should bone up on how conflicts, even small ones, bias the judgment of people we rely on for financial advice. To do that, read one of George Loewenstein's papers here.