The California Public Employees’ Retirement System, the largest U.S. public pension fund, is ratcheting down expected investment gains over the next decade as low interest rates and a gloomier stock market depress returns.

The $306.2 billion pension fund expects an average return of 6.21 percent, which is 90 basis points, or 0.9 percent, less than the forecast two years ago, says Chief Investment Officer Ted Eliopoulos, at an investment committee meeting in August. The forecast came from consultant Wilshire Associates, which issued a rosier long-term prediction: a 7.83 percent return over 30 years.

CalPERS dimmed its outlook after reporting a gain of 0.6 percent in the fiscal year ended June 30, with losses in both stocks and forestland. That followed a 2.4 percent return in fiscal 2015.

“The next two years, the next five years, and perhaps the next 10 years are shaping up to be the most challenging market environment for us, for institutional investors and for pension funds going forward,” Eliopoulos says.

CalPERS investments must return an average of 7.5 percent over the next 30 years for the fund to meet its obligations to retirees without turning to taxpayers. The fund, as of 2014, had about 76 percent of the assets it needed to meet its long-term anticipated obligations, according to information on the CalPERS website.

CalPERS’ annualized returns were 6.9 percent for the last three years, 5.1 percent for the last 10 years and 7 percent over 20 years, according to a presentation to the board last month. It is among U.S. pensions under pressure to boost investment returns as funding shortfalls increase amid an aging population and low interest rates.

Stock Markets

Wilshire attributed much of its less-optimistic forecast to public stocks, the largest single category of CalPERS investments at roughly 52 percent of the total fund value as of June 30. Stocks are likely to return an annualized 4.7 percent over the next 10 years, the Santa Monica, California-based consultant says, below CalPERS’ 5 percent benchmark.

Eliopoulos says CalPERS will adjust its asset allocations to cushion its holdings against the weaker-than-expected equity market.

Members of the investment committee called the forecast sobering and says it points to the need to review both the breakdown of the fund’s holdings and its 7.5 percent return assumption. CalPERS officials have said the anticipated rate of return is still realistic, noting that investments have earned an average annual return of 8.3 percent since the current fund structure was created in 1988.

“I don’t think we can always rely on saying that markets are cyclical given that we’ve reached that inflection point,” said board member Dana Hollinger, at the meeting.

Written with assistance from John Gittelsohn.