The California Public Employees’ Retirement System (CalPERS) announced its decision to adopt a funding risk mitigation policy to ensure the sustainability of the pension system over the long-term.
According to CalPERS, the funding risk mitigation policy was designed to lower the discount rates in years of good investment returns, help lower the unfunded liability of the pension fund, and increase predictability and lessen the volatility in contribution rates for employers.
CalPERS’ new policy aims to reduce the impacts of another financial crisis
Rod Feckner, the president of the Board of Administration of CalPERS, said, their priority is to ensure the long-term sustainability of the pension fund. According to him, the funding risk mitigation policy will help achieve that objective.
“It makes significant strides in lowering risk and volatility in the system, and helps lessen the impacts of another financial downturn,” said Feckner.
On the other hand, the pension fund’s CEO Anne Stausboll said, “Our goal is to be fully funded with an acceptable level of risk. This policy is a balanced approach that recognizes the fiscal constraints on California’s local agencies and represents a milestone for CalPERS.”
CalPERs expects portfolio volatility to decline to 8%
Under the funding risk mitigation policy, CalPERS will establish a mechanism to reduce the discount rate or assumed rate of return by a minimum of 0.05% to a maximum of 0.25% during the years when investment returns outperform the existing discount by at least 4%. The pension fund’s existing discount rate is 7.5%.
According to the pension fund, the 4% threshold would offset increases in employer contribution rates and help pay down the unfunded liability of the pension fund.
CalPERS expected the funding risk mitigation policy to lower its estimated portfolio volatility to 8% in about 21 years, improve its funding levels gradually, and lower risk in the pension system by reducing the volatility of investment returns.
Its action was primarily in response to the maturing workforce. The pension fund explained that the ratio of active workers to retirees is more than 2 to 1 a decade ago. Now that ratio is 1.6 workers for every retiree. The pension fund anticipates the downward trend to continue over the next 20 years.
The pension noted a 13% in state retirements last year from the previous year. The pension fund is now paying more in retirement benefits that receiving contributions. During fiscal 2014 to 2015, it paid $18 billion in pension benefits compared with the $13 billion in contributions.
The CalPERS Board adopted the policy after completing an 18-month risk examination of the pension system.