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CalPERS Moving Forward with Risk Mitigation Efforts [Human Resources and Personnel]

At their August board meeting, the CalPERS Board voted in favor of proceeding with the "Flexible Glide Path" plan to address issues of unfunded liabilities. CalPERS had two plans that has been under consideration since November of 2014. The board made the decision to move forward with the "Flexible Glide Path" over the more conservative option of the "Blended Glide Path."

CalPERS is taking this action to address potential long term funding risks. Due to the maturity of the fund, increases to benefits in the '90s and extreme market losses in 2008, CalPERS has modeled out the next five decades and identified increased volatility to the fund should risk mitigation efforts not take place.

This is significant for several reasons. If no risk mitigation efforts are taken,
public agencies have a:

  • Forty-seven percent probability of their plans falling below 60 percent funded, and a 26 percent chance of falling below 50 percent funded
  • Twenty-two percent probability of employer contribution rates exceeding 35 percent of payroll
  • Forty-eight percent chance of employer contribution rates increasing by more than three percent in a single year.

To address this increased risk, CalPERS identified two potential strategies that they refer to as "Glide Paths" to reduce volatility in the funds and to ensure the long-term health of the plans. Using either of the glide path options, CalPERS hopes to reduce risk while providing employers with a more predictable and less dramatic schedule of rate increases.

The options being reviewed by the board were the "Flexible Glide Path" and the "Blended Glide Path." Both glide paths would require greater employer and employee contributions over the next 20 years and would reduce the volatility of the funds to acceptable levels. However, the plans have different levels of impacts on employers.

There is a cost to reducing risk. Under the Flexible Glide Path that CalPERS has decided to pursue, risk to the Fund will be lowered by reducing the discount rate on employers following a year of excellent investment returns. The costs of that action will be bore by employers and employees alike. Lowering the discount rate increases normal costs on employers, which will automatically increase employee contributions under PEPRA.

The CalPERS staff will be finalizing the details of the Flexible Glide Path plan and the CalPERS Board will review it at their October board meeting. The Flexible Glide Path plan will be voted on for final approval at the CalPERS November board meeting.

Click here to visit the CSDA website for the full story and related documents.

 

 

 

 

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