By Peter Hoffmann, RLS
On March 18, 2013, CalPERS Chief Actuary Alan Milligan provided the Finance & Administration Committee with its “Annual Review of Funding Levels and Risks.” Despite the improving economy and unprecedented pension overhaul set forth in the Public Employees’ Pension Reform Act (“PEPRA”), Milligan warned that CalPERS nonetheless continues to face significant risks and challenges moving forward. Of particular concern are the long-term projections of the CalPERS investment fund and the potential for continued significant rate increases for participating employers.
According to Milligan, despite CalPERS’ success in recovering from the Great Recession, maintaining the existing actuarial assumptions, actuarial methods and the investment policies would expose the pension system to a number of embedded risks. Most notably, Milligan suggests:
- Each of the CalPERS plans – including local public safety and miscellaneous plans – is likely to fall below the 50% funding level at some point in the next 30 years.
- There is a significant possibility (although not a probability) that employer contributions for safety plans will reach 50% of payroll, while miscellaneous plans could foreseeably reach 30% of payroll.
- Employers should be prepared to experience a significant annual increase in contribution rates at some point over the next 30 years – including the probability of an annual rate increase of 5%-7% for safety employees.
Milligan’s concerns have not fallen on deaf ears. After making a presentation to the CalPERS Pension & Health Benefits Committee on March 19, 2013 suggesting a number of changes to the actuarial policies, the Board approved the first reading of changes that could result in significant employer rate increases to be phased in over five years beginning in FY 2015/16 and an increased likelihood that employer contribution rates will soar in the coming years, as the likelihood that local safety rates exceed the 50% threshold nearly doubles. While the board asked for more information before final approval next month, Milligan’s projections appear destined to bring about significant changes in order to protect the fund. Notably, the proposed changes tentatively approved by the Board are over and above those that would be required in the event CalPERS were to further reduce its assumed rate of return (which was already reduced from 7.75% to 7.5%) or adjust assumptions relating to members’ life expectancies.
As the proposed rate changes may causing immediate financial stress just as most employers are coming to accept that the Great Recession has subsided, the prospect of significant increases to the employer rate will have a direct impact on employers and employees, particularly in the context of collective bargaining.
A copy of the CalPERS Annual Review of Funding Levels and Risks can be found at:
Alan Milligan’s presentation to the Pension & Health Benefits Committee can be found at:
The materials provided to the Pension & Health Benefits Committee can be found at: