CalPERS Pension and Health Benefits Committee Recommends New Discount Rate

SACRAMENTO, CA – The Pension and Health Benefits Committee of the California Public Employees’ Retirement System (CalPERS) today approved a recommendation to reduce CalPERS discount rate – or the rate of investment return the pension fund assumes – to 7.5 percent.

The Committee’s recommendation will be considered by CalPERS full Board for approval tomorrow.

Over the past year, the CalPERS Actuarial Office conducted its own study and hired an independent evaluator to assess economic assumptions. The discount rate is calculated based on expected price inflation and real rate of return. Based upon information from both studies, CalPERS Actuaries recommended that the assumption for price inflation be reduced from 3 to 2.75 percent. When added to the current real return assumption of 4.75 percent, this produces a discount rate of 7.5 percent.

CalPERS actuaries offered the Pension and Health Benefits Committee two options to protect the soundness of the pension plan: a 7.25 percent discount rate that includes an adjustment to add an element of conservatism to further protect against lower returns, or a 7.5 percent discount rate without such an adjustment.

“We are sensitive to the severe pressure many employers face in order to meet budgets and make required contributions,” said Committee Chair Priya Mathur. “We believe a 7.5 percent discount rate is a fiscally sound alternative that balances the need to keep employer contributions stable with the realities of what we can expect from our investments in the current financial markets.”

If approved by the full Board, the new assumptions will have the following results:

State and schools employer contributions will increase by 1.2 to 1.6 percent for Miscellaneous plans and 2.2 to 2.4 percent for Safety plans beginning Fiscal Year 2012-13. According to staff estimates, the change in the discount rate is expected to cost the State $303 million, of which approximately $167 million would come from the State’s general fund. The school increase would be approximately $137 million.
Public Agency contributions will increase by 1 to 2 percent for Miscellaneous plans and 2 to 3 percent for Safety plans beginning Fiscal Year 2013-14.
The new discount rate will apply to service credit purchases and estimate requests postmarked, delivered or faxed on or after March 15, 2012. Costs will increase between 5 and 13 percent depending on the individual circumstances of members.
Retirement applications with a retirement date on or after March 15, 2012 will be calculated with the new discount rate. Members who choose optional benefits – leaving some part of their benefit to a spouse or beneficiary after their death – will experience approximately a 2 percent increase in cost.

“In accordance with best practices, and to comply with Board policy, we need to regularly review our economic assumptions,” said Chief Actuary Alan Milligan. “We are confident this is a sound recommendation considering current economic conditions. The choice that was before the committee today was difficult and a controversial one and I believe that all employers, members and other stakeholders should support the committee’s action.”

In March 2011, the CalPERS Board voted to keep the current rate of 7.75 percent by eliminating the margin for negative returns. That decision was partially made to help employers during these difficult economic times, but was also contingent upon a reassessment this year. CalPERS discount rate was last changed 10 years ago, when it was lowered to 7.75 percent from 8.25 percent.

CalPERS, with assets of approximately $233 billion, is the largest public pension fund in the U.S. It administers retirement benefits for more than 1.6 million California State, local government, and public school employees, retirees, and their families on behalf of more than 3,000 public employers, and health benefits for more than 1.3 million enrollees. The average CalPERS pension benefit is $2,332 per month. The average benefit for those who retired in the most recent fiscal year that ended June 30, 2011, is $3,065 per month. More information about CalPERS is available at www.calpers.ca.gov.

Press Release

CalPERS Pension and Health Benefits Committee Recommends New Discount Rate