News

CalPERS Discusses Possible Changes to Funding Policy

03-01-2013 |

Alan Milligan, CalPERS Chief Actuary, made a presentation to CSMFO on February 22nd, preceded by a CalPERS Board workshop on the 21st. The presentation discussed potential changes to the contribution methodology that will likely result in much higher contribution rates and higher volatility in normal years but much less contribution volatility for extreme events. These would likely first impact FY 15/16 contribution rates.

Alan Milligan, CalPERS Chief Actuary, made a presentation to CSMFO on February 22nd, preceded by a CalPERS Board workshop on the 21st.  I understand CalPERS will be posting a video of the workshop and we will provide a link to that video when available.  Here are the highlights from the CSMFO presentation:

1.  GASB 68:
     a.  CalPERS will likely not be ready to provide information for fiscal years < 2014/15.
     b.  They expect to provide information, but only upon request.
     c.  They are going to their Board for approval to make necessary system changes and need that approval before they can say for certain they will provide that information.
2.  CalPERS actuarial staff is looking to make some changes to their contribution policy.  Here are the four reasons why:
     a.  Asset corridor generates volatility when extreme events occur.
     b.  There is very slow progress currently and expected into the future, towards increased funded status.
     c.  Current method needs improved transparency.
     d.  GASB 68 encourages faster funding by requiring a lower discount rate for slower funding.
3.  They are looking at the following options:
     a.  No asset corridor in conjunction with shorter smoothing period and fixed (likely shorter) amortization periods.
     b.  Direct rate smoothing based on:
          i.  5 year ramp up.
          ii.  No asset smoothing.
          iii.  25 year amortization period.
          iv.  No cap on rate increases each year.
4.  He is going to the Board in March with recommendations and he said he will likely recommend direct rate smoothing.
     a.  Will likely result in much higher contribution rates and higher volatility in normal years but much less contribution volatility for extreme events.
     b.  Believes it will be easier for Board to accept assumption changes (see below) if included in direct rate smoothing.
5.  They are starting an assumption study and he will likely recommend generational mortality improvement.
6.  They are starting an asset allocation study and he believes:
     a.  He will again recommend a 0.25% margin.
     b.  Possibly (but does not know until asset allocation study is done) recommend 0.25% reduction in real rate of return.
7.  All the above will probably be included in 6/30/13 valuation (first year impact in 15/16 rates or, perhaps in 16/17 rates) but will be estimated as part of 6/30/12 valuation when they project contribution rates.

Please let us know if you have any questions or want to set a time to talk about the above.

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