The board of the nation’s largest pension fund voted Monday to use borrowed money and alternative assets to meet its investment-return target, even after lowering that target just a few months ago.

The move by the $495 billion California Public Employees’ Retirement System reflects the dimming prospects for safe publicly traded investments by households and institutions alike and sets a tone for increased risk-taking by pension funds around the country.

Without...

The board of the nation’s largest pension fund voted Monday to use borrowed money and alternative assets to meet its investment-return target, even after lowering that target just a few months ago.

The move by the $495 billion California Public Employees’ Retirement System reflects the dimming prospects for safe publicly traded investments by households and institutions alike and sets a tone for increased risk-taking by pension funds around the country.

Without changes, Calpers said its current asset mix would produce 20-year returns of 6.2%, short of both the 7% target the fund started 2021 with and the 6.8% target implemented over the summer.

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“The times have changed since this portfolio was put together,” said Sterling Gunn, Calpers’ managing investment director, Trust Level Portfolio Management Implementation.

Board members approved borrowing and investing an amount equivalent to 5% of the fund’s value, or about $25 billion, as part of an effort to hit the 6.8% target, which they voted not to change. The trustees also voted to increase riskier alternative investments, raising private-equity holdings to 13% from 8% and adding a 5% allocation to private debt.

Borrowing money to increase returns allowed Calpers to justify the 6.8% target while maintaining a more-balanced asset mix, concentrating less money in public equity and putting more in certain fixed-income investments, fund staff and consultants said.

Retirement funds around the U.S. have been pushing into alternative assets such as real estate and private debt to drive up investment returns to pay for promised future benefits. Funds have hundreds of billions of dollars less than what they expect to need to pay for those benefits, even after 2021 returns hit a 30-year-record.

Courts have resisted changing benefits for current workers and many cities and states are already struggling to cover yearly retirement costs, in some places turning to borrowing money or legalizing marijuana.

Calpers’ 20-year return expectation fell to 6.8% from 7% over the summer in accordance with a 2015 policy that dictates Calpers take advantage of high-return years to roll back the rate to mitigate the impact on public employers and workers from those yearly costs. At Monday’s meeting, city officials from across California urged the board not to further lower the rate.

Board member Lisa Middleton said she wanted the board to explore more possibilities for how to further drive up investment returns and protect public employers and workers from high annual costs. Ms. Middleton is a member of the Palm Springs city council who holds the board seat reserved for a local government elected official.

Board member Betty Yee, the California state controller, said she had concerns about how investments made with borrowed money could perform in unfriendly markets.

Calpers’ investment office already had authority to use leverage—up to 20% of the fund’s total value—as part of investing decisions. But Monday’s decision marks the first time the Calpers board has made leverage an integral part of its asset mix, building it into the fund’s plan for meeting its investment-return target.

Fund staff said they might want to use borrowing that way more going forward.

Write to Heather Gillers at heather.gillers@wsj.com