Administration April 17, 2013

CalPERS Approves Plan to Improve Funding

April 17, 2013 (PLANSPONSOR.com) - The California Public Employees’ Retirement System (CalPERS) Pension & Health Benefits Committee approved actuarial policies aimed at returning the System to fully-funded status within 30 years.
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The new rate smoothing and amortization methods used when setting employer contributions were proposed by the Actuarial Office to address risk identified in the “Annual Review of Funding Levels” report, which was presented to the CalPERS Board of Administration by CalPERS Chief Actuary Alan Milligan during the Pension Fund’s March Board meetings.

The report showed that most CalPERS plans are now between 65% and 80% funded, and the desired goal is 100% funding. Using current smoothing methods, progress toward 100% funded status is very slow for many plans. Despite significant gains in the investment portfolio, liabilities continue to grow faster than assets.

The Actuarial Office recommended, and the Pension & Health Benefits Committee approved, the rate smoothing method with a 30-year fixed amortization period for gains and losses. The amortization would have a five-year ramp up of rates at the start and a five-year ramp down at the end.

In addition to reaching full funding in 30 years, the new method will also help avoid large increases in employer contribution rates in extreme years, while maintaining a reasonable level of change in normal years. However, employer contributions will rise by nearly 50% in the short-term as the plan is implemented. To mitigate the initial rate increases, the Committee voted to delay implementation for all employers including state and schools until Fiscal Year 2015-16.

"We understand that rate increases never come at a good time," said Priya Mathur, Pension & Health Benefits Committee Chair. “This is a difficult and important decision that we have been working toward for 18 months, involving our stakeholders in discussions at conferences, workshops and other meetings.”

Milligan added: “We will need to consider our discount rate and asset allocation as well, but those are decisions for the future. I deeply appreciate the commitment of our Board to address the risks we face."

Based on investment return simulations performed for the next 30 years, using the newly adopted methods, in seven years, the state miscellaneous plan median employer contribution rate is expected to be 29.2%, but the plan has a median funded status of 103% in 30 years. In sum, increasing contributions more rapidly in the short term is expected to result in almost a 25% improvement in funded status over a 30-year period.  

Find a detailed explanation of the new rate smoothing methods, a video workshop and the "Annual Review of Funding Levels and Risk".

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