CalPERS Adopts New Demographic Assumptions

The California Public Employees’ Retirement System (CalPERS) Board of Administration today approved new demographic assumptions designed to ensure greater sustainability and soundness of the pension fund in the decades to come.

The Board also adopted an asset allocation mix that lowers the CalPERS investment risk but largely keeps its investment strategy unchanged, holding the fund’s long-term assumed rate of return at 7.5 percent.

While today’s action will result in higher pension costs for the State and CalPERS contracting employers, it helps to stabilize pension costs over time and puts CalPERS on a path to meet the pension obligations promised to current and future public employees.

“These are important decisions,” said Rob Feckner, President of the CalPERS Board. “We have spent the better part of two years making changes that will continue CalPERS on even stronger solid footing and that helps everyone who has a vested interest in our fund.”

Specifically, CalPERS Board approved new demographic assumptions that take into account public employees living longer based on a recent study of CalPERS membership. Findings show men are expected to live two more years and women a year and a half longer. The study also showed higher rates of retirement for certain member groups, including police officers and firefighters. These new assumptions will raise employer pension costs in the future.

The Board adopted staff’s recommendation for local public agencies and school districts to implement costs in the 2016-17 Fiscal Year with the cost spread over 20 years and the increases phased in over five years.

The Board also voted to approve implementing the increases for the State beginning in the 2014-15 Fiscal Year with the cost spread over 20 years and the increases phased in over three years. This was based in part on the Governor’s stated ability that the State could pay earlier.

“These changes establish a clear window into the future costs of pensions,” said Priya Mathur, Vice President of the CalPERS Board. “We recognize that the fiscal environment at the local level is still tight but not taking action will only put costs off to a future day at a greater expense.”

CalPERS staff estimate the local governments could see costs rise up to 5 percent of payroll for average state employees and up to 9 percent of payroll for safety classifications in year five of the phase in.

The State of California is expected to pay $1.2 billion more at the end of the three year period. The State currently pays approximately $3.8 billion for state employee pensions.

Adoption of the new assumptions marks the third change in factors that impact the long-term funding of the system. In March 2012, the pension fund lowered its discount rate from 7.75 percent to 7.5 percent citing economic conditions. A year later, CalPERS changed its policies to recognize gains and losses over a shorter period and to use a 30-year fixed amortization period instead of a rolling 30-year period.

CalPERS investment portfolio will have a target allocation of 47% to equities, 19% to fixed income, 6% to the inflation-sensitive securities, 12% to private equity, 11% to real estate, 3% to infrastructure and forestland and 2% to liquidity.