The California Public Employees' Retirement System (CalPERS) Board of Administration voted to lower the discount rate from 7.5% to 7% over the next three years. This incremental lowering of the discount rate will give employers more time to prepare for the changes in contribution costs.
The discount rate changes approved by the Board for the next three Fiscal Years (FY) are as follows:
- FY 2017-2018: 7.375%
- FY 2018-2019: 7.25%
- FY 2019-2020: 7%
In addition, the Board approved separate timelines for implementing the new rate for state, school, and public agencies. The new discount rate for the state would go into effect July 1, 2017. The new discount rate for the school districts and public agencies would take effect July 1, 2018. The difference allows schools and public agencies additional time to plan for rate increases.
Lowering the discount rate, also known as the assumed rate of return, means employers that contract with CalPERS to administer their pension plans will see increases in their normal costs and unfunded actuarial liabilities. Active members hired after January 1, 2013, under the Public Employees' Pension Reform Act will also see their contribution rates rise. Normal cost is the cost of pension benefits for one year.
The three-year reduction of the discount rate will result in average employer rate increases of about 1% to 3% of normal cost as a percent of payroll for most miscellaneous retirement plans, and a 2% to 5% increase for most safety plans.
Additionally, many CalPERS employers will see a 30% to 40% increase in their current unfunded accrued liability payments. These payments are made to amortize unfunded liabilities over 20 years to bring the fund to a fully funded status over the long-term.
"This was a very difficult decision to make, but it is an important step to ensure the long-term sustainability of the fund," says Rob Feckner, president of the CalPERS Board of Administration. "We know this will have an impact on the state, schools, and public agencies that partner with us, and we're committed to making sure the changes are implemented in a phased approach so our employers and affected members have time to plan their budgets responsibly."
Beginning in 2017, the Board will start reviewing the fund’s asset allocation mix during the next Asset Liability Management process. The process, which includes a review of the discount rate, will conclude in February 2018.