David LamoureuxCalPERS Deputy Chief Actuary

CalPERS Update

Agenda• GASB 68 – What is CalPERS Planning to Do• Changes to Smoothing and Amortization

Methods• What’s Happening at CalPERS

CalPERS Update

GASB 68 – What is CalPERS Planning to Do

CalPERS Update

New GASB Standards• GASB Statement No. 67– Applies to plans (CalPERS)– Replaces GASB Statements No. 25

• GASB Statement No. 68– Applies to employers– Replaces GASB Statements No. 27

CalPERS Update

Will CalPERS Provide GASB 68 Information?

• Planning on it• Will require extensive changes• Cannot use trust fund money

CalPERS Update

Fee for GASB Valuation

• CalPERS Board gave approval to proceed and charge employer– GASB valuations will be done on request– Not mandatory– Fees expected to be known in fall of 2014– Likely to be different by “pooled” vs “non-pooled”

• More details to follow

CalPERS Update

Potential GASB Implementation Issues

• Need actuarial computer system re-write• Ability to hire staff• Timing of plan specific asset information• Need to be ready by spring of 2015– Most employers will need the information for June

30, 2015 CAFR

CalPERS Update

Potential GASB Implementation Issues

• For first few years, CalPERS may not be able to provide all necessary information

• Example– Cross-over calculation to determine discount rate

• Employers will have to rely on outside actuarial firm if information provided by CalPERS is deemed not sufficient by their auditors

CalPERS Update

Changes to Smoothing and Amortization Methods

Current Smoothing Policies• Originally adopted by Board in April 2005• Asset Smoothing Policy– 15 year rolling smoothing period– Actuarial Value of Asset (AVA) corridor– 80%-120% of Market Value of Assets (MVA)

• Amortization Policy– 30 year rolling amortization of gains and losses

CalPERS Update

New Methods• Adopted by CalPERS Board in April 2013• 5 year direct rate smoothing– 5 year ramp up/down– 30 year amortization of gains and losses

• 5 year direct rate smoothing also applies to assumption changes– 20 year amortization with 5 year ramp up/down– Automatic smoothing of assumption changes

CalPERS Update

Current Method vs. New MethodCalPERS Update

Current Method vs. New MethodCalPERS Update

Assessment of New Methods• What we like:– Less volatility in extreme years– Faster improvement in funded status– Transparency of future contribution requirement– Only one asset value; only one unfunded liability– GASB e.g. cross over calculation

• What we don’t like– More volatility in rates in normal years

CalPERS Update

Impact of New Methods• No impact on normal cost• Will impact employer contribution rates for

the first time in 2015-2016• Higher contributions short term but lower

contributions long term (25 + years) with savings over the long term

• Better funded status long term• Impact is included in valuation report

CalPERS Update

What’s Happening at CalPERS

Review Of Asset Allocation• Board reviews asset allocation every 3 years• Asset liability workshop scheduled on

November 12th and 13th

– Final asset allocation will be adopted in December 2013

• Implications are potential changes to discount rate assumption– Would be adopted in February 2014

CalPERS Update

Discount Rate• Two issues– Is the expected return too high?– Should we include a margin for conservatism in

the discount rate to discount liabilities?• Board decision expected in February 2014

CalPERS Update

Review of Actuarial Assumptions• Review of demographic and economic

assumptions• Once every 4 years– Work currently under way

CalPERS Update

Mortality Improvements• Study is showing that life expectancy has

improved again the last 4 years• Discussion taking place on how much future

improvements should be assumed– Improvements needed to properly fund the system– Actuarial Standards of Practice– Expected to result in higher contribution

requirements– October Board workshop

CalPERS Update

CalPERS Update

1994 Study 2004 Study 2009 Study 2013 Study77

78

79

80

81

82

83

84

85

86

87

Life Expectancy for a CalPERS Member Retiring at Age 55

MaleFemale

CalPERS Update

1994 Study 2004 Study 2009 Study 2013 Study Projected 2018 Projected 2023 Projected 202876

78

80

82

84

86

88

Life Expectancy for a CalPERS Member Retiring at Age 55(With Improvements Using Scale BB)

MaleFemale

Potential Impact• Change in demographic assumptions will

impact normal cost– Could result in higher member contribution for

PEPRA members• Mortality projection– Impact will depend on how much mortality

improvements is assumed– Impact will be phased-in over 5 years as per new

smoothing policies

CalPERS Update

Potential ImpactCalPERS Update

10 Year of Mortality

Improvements

15 Year of Mortality

improvements

20 Year of Mortality

improvements

Estimated Impact on Total Normal Cost

0.2% to 0.4% of Payroll

0.3% to 0.6% of Payroll

0.5% to 0.8% of Payroll

Estimated Impact on Member Rate

No Impact No Impact No Impact

Impact on Employer Rate(Year 1)

0.4% to 0.9% of Payroll

0.7% to 1.4% of Payroll

1.0% to 1.8% of Payroll

Impact on Employer Rate(Year 6)

1.4% to 3.9% of Payroll

2.1% to 4.9% of Payroll

2.8% to 6.4% of Payroll

* Based on a sample of 10 plans.

Key Dates• November 12 and 13, 2013– Asset Liability Workshop

• December 2013– Board adoption of new asset allocation– Preliminary recommendations for new actuarial

assumptions• Economics• Demographics

CalPERS Update

Key Dates• February 2014– Final adoption of actuarial assumptions

• If changes are made, would impact 2013 valuation setting 2015-2016 rates or the 2014 valuation setting the 2016-2017 rates

http://www.calpers.ca.gov/eip-docs/about/press/news/invest-corp/timeline.pdf

CalPERS Update

PEPRA– Risk Pool Impact• CalPERS Board created two new risk pools– Miscellaneous 2% at 62– Safety 2.7% at 57, 2.5% at 57 and 2% at 57

• Existing Pools are closed to new entrants– Need to address amortization of side funds and pool

unfunded liability• Looking at various solutions– Discussion will take plan at November Board meeting– Board decision is expected next spring

CalPERS Update

PEPRA – Excessive Compensation• PEPRA includes a provision on excessive

compensation• Intent is for employers granting “excessive

compensation” to pay for the increase in actuarial liabilities it may have caused to other employers

• Looking at proposed regulations in Summer 2014

CalPERS Update

Funding Risk• Funding Risk report in March• Actuarial valuation reports all include a risk

analysis section:– Discount Rate Sensitivity Analysis• Employer rate under different discount rate• 6.5% and 8.5% discount rate

– Investment Return Sensitivity analysis• Projection of employer rate up to 2019-2020• 5 scenarios

CalPERS Update

Questions?