A California law, the Public Employees’ Pension Reform Act (PEPRA), closed existing benefit formulas and created new benefit formulas for new state employees hired after January 1, 2013. As a result, PEPRA effectively closed the existing pension risk pools, which would have prompted a general contribution increase for employers in those pools. CalPERS acted in anticipation of these undesired increases by making changes to the structure of risk pooling.
CalPERS’ new actuarial policies create significant changes to the risk pooling structures by:
- Combining 12 risk pools into two, one for all miscellaneous plans and one for all safety plans; and
- Changing the mechanisms of how the employer’s unfunded liability is determined and collected, and what portion of their contributions will be used first to pay down these unfunded liability obligations.
“These changes will prevent an unintended contribution increase while simultaneously addressing funding, equity and rate volatility issues for smaller employers,” says Rob Feckner, president of the CalPERS Board, based in Sacramento, California. “We are committed to helping employers reduce their unfunded liabilities and to fully funding our risk pools to support the next generation of California’s work force.”
While these changes will avoid a general increase in employer contributions to fund the risk pools, the changes will result in contribution increases for some individual employers and a reduction in contributions for other employers. Employers with a high ratio of retirees to active members are expected to see a relatively modest increase, while employers with fewer retirees are expected to see a relatively modest decrease in contributions.
Changes to the risk pools will allow employers with additional flexibility to pay down their share of the pools' unfunded liability, a request made by many CalPERS employers.
CalPERS first implemented risk pools in June 2003 for employers with 100 or less active members. Risk pooling is a type of insurance arrangement for employers that spreads demographic risks, avoids large liability losses and uses a rate smoothing method to protect against large fluctuations in contribution rates caused by service retirements and work-related disability and death events. According to CalPERS, more than 1,200 contracted employers participate in risk pools that include more than 3,500 pooled plans.