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M-6101411 Notes to the Financial Statements June 30, 2020 NOTE 7 —PENSION PLANS (continued) D. California Public Employees' Retirement System (CalPERS) Pension Plan (continued) Long-term expected rate of return The long-term expected rate of return on pension plan investments was determined using a building-block method in which expected future real rates of return (expected returns, net of pension plan investment expense and inflation) are developed for each major asset class. In determining the long-term expected rate of return, CaIPERS took into account both short- term and long-term market return expectations as well as the expected pension fund cash flows. Using historical returns of all the funds' asset classes, expected compound (geometric) returns were calculated over the short-term (first 10 years) and the long-term (11+ years) using abuilding-block approach. Using the expected nominal returns for both short-term and long-term, the present value of benefits was calculated for each fund. The expected rate of return was set by calculating the rounded single equivalent expected return that arrived at the same present value of benefits for cash flows as the one calculated using both short-term and long-term returns. The expected rate of return was then set equal to the single equivalent rate calculated above and adjusted to account for assumed administrative expenses. The expected real rates of return by asset class are as follows: (1) In the System's CAFR, fixed income is included in global debt securities; liquidity is included in short-term investments; inflation assets are included in both global equity securities and global debt securities. (2) An expected inflation of 2.0% used for this period (3) An expected inflation of 2.92% used for this period Change of assumptions There were no changes of assumptions. Current target Real return Real return Asset class �� allocation year 1 - 10 (2) year 11 + (3) Global equity 50.00% 4.80% 5.98% Fixed income 28.00% 1.00% 2.62% Inflation assets 0.00% 0.77% 1.81% Private equity 8.00% 6.30% 7.23% Real assets 13.00% 3.75% 4.93% Liquidity 1.00% 0.00% -0.92% Total 100.00% (1) In the System's CAFR, fixed income is included in global debt securities; liquidity is included in short-term investments; inflation assets are included in both global equity securities and global debt securities. (2) An expected inflation of 2.0% used for this period (3) An expected inflation of 2.92% used for this period Change of assumptions There were no changes of assumptions.