CalPERS to Vote on Final Stage of ALM Plan

(January 7, 2014) – The board of the California Public Employees’ Retirement System (CalPERS) is set to take action on the final elements of its current asset liability management plan.

During a meeting on February 18, the board will vote on new economic and demographic actuarial assumptions, including a new discount rate. These “actions to strengthen integrity” will, according to fund documents, “likely increase contributions.”

However, CalPERS’ deputy and chief actuaries have expressed concern about the feasibility of their recommendations for public employers.

“The recommended changes to the actuarial assumptions will have a significant impact on participating employers at a time when their budgets are already strained,” wrote David Lamoureux and Alan Milligan in a review of their strategic plan. “Concern has been raised that the contribution increases may be too much for employers to bear.”

Assumption changes would be phased in over a five-year ramp-up period, and amortized over 20 years. Finally, they would be phased out over five years, although the precise impact of the new regimen would be determined by each member group’s demographics.

The head actuaries offered alternative amortization schedules to ease the transition for strapped employers.

According to the review documents, the most significant change recommended was a boost to longevity assumptions. This alone would add 2.5% to 6.4% to payroll costs, depending on the plan and proportion of male to female members.

CalPERS has undertaken a number of steps recently to reign in its actuarial assumptions and boost contributions.

In 2012, as part of a regulation review of economic expectations, the fund lowered its discount rate from 7.75% to 7.5%. This followed an even greater drop in 2004, when the board voted to decrease its 8.25% return assumption to 7.75%.

Any further lowering in the discount rate would reduce the funded status of CalPERS’ plans, which sat between 65% and 80% as of December 2013.