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California’s state pension fund has adopted a new methodology to analyse asset allocations, performance and risk in a governance overhaul that could have market implications for how it invests its $556bn in assets.

The changes, using a form of analysis known as “total portfolio approach”, will give the California Public Employment Retirement System’s investment team broader discretion to adjust allocations across asset classes, and measure returns against a single portfolio benchmark. It will replace the 11 benchmarks it currently uses to assess performance of individual asset classes.

The overhaul was approved by the board of Calpers at a meeting on Monday. It comes after years of below-average investment results, and brings the pension fund closer to global peers that have moved away from rigid asset-class silos. Calpers reported an average annual return of 7.1 per cent in the decade to 2025, below the 7.4 per cent national average, according to the Equable Institute.

The changes come into effect on July 1. One immediate result will see Calpers raise its target equity allocation to 75 per cent from 72 per cent.

“The driving rationale for this is to invest the portfolio as a whole,” said Stephen Gilmore, Calpers’ chief investment officer. “The overall objectives are to ensure that the system is sustainable and . . . improves the likelihood that we generate somewhat higher returns and improve the funded ratio.”

Gilmore said the traditional strategic asset allocation model — in which funds set fixed long-term weights for each asset class and regularly rebalance back to those targets — encouraged buying high and selling low, and left teams managing assets in isolation.

Calpers’ 11 existing benchmarks — ranging from private equity to fixed income — illustrate the problem, Gilmore noted. “It becomes quite hard to see just how the overall portfolios perform,” he said. By contrast, the new strategy introduces a single reference portfolio, made up of global equities and US Treasuries, which he said would “make it much simpler” to judge performance and risk.

The new framework limits active risk within 400 basis points — how much the fund’s performance is allowed to diverge from the 75:25 reference portfolio. The board also voted to keep the plan’s discount rate unchanged at 6.8 per cent.

Gilmore acknowledged that raising equity exposure to 75 per cent “adds a little bit more risk”, but argued this was justified over a long horizon. “It’s always very hard to time the market in terms of adding risk.”

The new 400bp guardrail replaces a maze of asset-class rules with one overall cap on how much the portfolio can differ from its reference mix. In reality, staff were expected to stay below that cap — within 250bp-350bp — rather than pushing up against the full limit, Gilmore said.

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With the adoption of the reference portfolio, he said: “The board and the public can see whether the management team has done a good job of actually beating the reference portfolio.”

Frank Ruffino, a Calpers board member, urged the fund to build in an early appraisal, proposing a “formal review of the efficacy of the total portfolio approach compared to the prior strategic asset allocation governance model” within two years of the transition.

Such a review, he said, would give the board “a clear and transparent evaluation of whether the shift to TPA improves outcomes”.