Home ListingNovember 19, 2015

CalPERS Targets 100% Funding with Discount Rate Changes

The US’ largest public pension wants to make future contributions more predictable—and close its 23% funding gap.

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The California Public Employees’ Retirement System (CalPERS) has implemented a risk management system which will see the fund reduce its expected rate of return following strong performance, with a view to achieving fully funded status.

“Our goal is to be fully funded with an acceptable level of risk.”In a statement on its website, CalPERS said it would reduce its discount rate—the assumed rate of return—by between 5 and 25 basis points following any year in which its realized investment returns had significantly outperformed its target.

Rob Feckner, president of CalPERS’ board of administration, said the move made “significant strides in lowering risk and volatility” and would reduce the impact of any future financial downturns.

“Our goal is to be fully funded with an acceptable level of risk,” CalPERS CEO Anne Stausboll added. “This policy is a balanced approach that recognizes the fiscal constraints on California’s local agencies and represents a milestone for CalPERS.”

CalPERS’ current benchmark return is 7.5%, and is used to calculate employer and member contributions. Under the new policy, if this is exceeded by 4 percentage points or more the next year’s benchmark rate will be reduced. The portfolio asset allocation will then be adjusted accordingly.

According to its website, CalPERS was 77% funded as of June 30, 2014. Its portfolio gained 2.4% in the 12 months to June 30 this year.

The $300 billion pension’s models indicated its portfolio volatility would be reduced to 8% within 21 years as a result of the change. The new policy is also designed to minimize increases in contributions from employers.