The largest pension fund in the United States is about to change how it invests roughly $600 billion. Starting July 1, 2026, the California Public Employees’ Retirement System (CalPERS) will run its money under a new model called the Total Portfolio Approach, a shift its board approved on November 17, 2025, and one that Chief Investment Officer Stephen Gilmore has spent more than a year championing. CalPERS says it is the first public pension fund in the country to make the move.

The change matters far beyond Sacramento. CalPERS pays retirement benefits for millions of California public workers, including teachers, firefighters, police officers and government employees. Its investment performance helps determine how much taxpayers and local governments must contribute to fund those pensions. Stronger returns can ease pressure on public budgets, while weaker performance can increase future funding obligations.

For years, CalPERS relied on a traditional investment framework known as strategic asset allocation. Under that system, the board established target allocations for stocks, bonds, private equity, real estate and other asset classes, and investment teams generally stayed within those predetermined buckets.

The Total Portfolio Approach breaks down those barriers.

Instead of focusing on whether individual asset classes meet target allocations, investment teams will evaluate opportunities based on how much they improve the entire portfolio. Managers will compete for capital across all investment categories, with funds directed toward opportunities believed to offer the best overall risk-adjusted returns.

To measure success, CalPERS will use a reference portfolio consisting of 75% equities and 25% fixed income investments. That benchmark is slightly more aggressive than the fund’s previous allocation structure and is designed to create room for investments that may generate higher long-term returns.

Investment staff will have flexibility to deviate from the benchmark but must remain within an overall risk budget of 400 basis points, or 4 percentage points. The board plans to review that risk limit every four years as part of its regular planning process.

Gilmore estimates the strategy could add approximately 50 to 60 basis points annually to investment performance. While that may sound modest, even half a percentage point of additional return can translate into billions of dollars over time for a fund of CalPERS’ size.

He has described the initiative as both a performance strategy and a cultural shift, emphasizing portfolio-wide decision-making rather than rigid allocation targets.

Gilmore brings extensive international experience to the role. He joined CalPERS in July 2024 after leading the New Zealand Superannuation Fund, where the sovereign wealth fund generated average annual returns exceeding 12% over a decade. He previously held senior positions at Australia’s Future Fund and the International Monetary Fund.

While the Total Portfolio Approach has become increasingly common among sovereign wealth funds and large institutional investors overseas, it remains relatively uncommon among U.S. public pension systems, which often operate under tighter governance structures and greater political scrutiny.

David Miller, chair of the CalPERS Investment Committee, said the board approved the shift as part of its effort to strengthen the fund’s long-term financial position and help reduce future costs borne by employers and taxpayers.

The change emerged from CalPERS’ latest Asset Liability Management Review, a process conducted every four years to assess whether expected investment returns are sufficient to meet future pension obligations. The fund currently assumes a long-term annual return of approximately 6.8%.

Not everyone is convinced the strategy will deliver the promised benefits.

Critics note that the effectiveness of total portfolio investing is difficult to measure because institutions implement the approach differently. Comparisons between funds can be challenging, making it difficult to determine whether better results come from the strategy itself or from favorable market conditions.

Some observers also point out that research supporting the model relies on a relatively limited sample size. Gilmore has acknowledged that investors should be cautious about drawing broad conclusions from any single study.

The model’s flexibility is its primary attraction, but it also concentrates more responsibility in the hands of investment staff and senior leadership. That increased discretion could lead to stronger performance—or amplify mistakes if major investment decisions prove unsuccessful.

For California’s public workers, taxpayers and government employers, the goal is straightforward: generate better long-term returns while maintaining disciplined risk management.

Whether the experiment succeeds may take years to determine.

The clock starts July 1.

JBizNews Desk — California

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