Workshop: Securing CalPERS’ Future...2011-2012. 2012-2013. 2013-2014. 2014-2015. 2015-2016....

Workshop: Securing CalPERS’ Future - Managing Funding Risks, Stakeholder

Outreach and Engagement

Finance & Administration Committee December 20, 2016

Agenda Item 9, Attachment 1 of 41

Workshop Objective

Why now?

Impacts

Timing


Why Now?

• Market conditions have changed • Seeing more uncertainty in the forecast • Next 10 years are consequential • To close the cash flow funding gap • Risks in system continue to grow


66.25

6.56.75

77.25

7.57.75

88.25

8.58.75

9

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29

Rate

of R

etur

n in

%

Years 1-30

2014 ALM Assumptions

8.05%

7.5%

66.25

6.56.75

77.25

7.57.75

88.25

8.58.75

9

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29

Rate

of R

etur

n in

%

Years 1-30

Current Environment

7.83%

6.2%

Change in Market Conditions

7.1%

7.5%

Assumed rate of return


Contribution & Benefit Payments

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

1999

-200

0

2000

-200

1

2001

-200

2

2002

-200

3

2003

-200

4

2004

-200

5

2005

-200

6

2006

-200

7

2007

-200

8

2008

-200

9

2009

-201

0

2010

-201

1

2011

-201

2

2012

-201

3

2013

-201

4

2014

-201

5

2015

-201

6

2016

-201

7

2017

-201

8

2018

-201

9

2019

-202

0

2020

-202

1

2021

-202

2

2022

-202

3

2023

-202

4

$ Billi

ons

Fiscal Year

Historical & Projected PERF Contributions & Investments for Benefit Payments

Current Contribution Additional Contribution 7.25% Additional Contribution 7.0% Investments Used


Sensitivity to Negative Investment Returns

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

2015 2020 2025 2030 2035 2040 2045 2050 2055 2060

Resu

lting

Pea

k Inc

reas

e In

ER R

ate

Year In which Loss Occurs

Peak Employer Contribution Rate Increase After a -2.5% Return

3.8%

5.0%

4.0%

7.6% 7.0%

3.8%

Sample Miscellaneous Sample Safety

2.8%

5.5%


Impacts

• Funded Status • Normal Cost • Unfunded Accrued Liabilities


Total PERF Funded Status

73.0% 70.7%

68.5% 68.0% 65.7%

63.5%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

7.50% 7.25% 7.00%

20152016*

Assumed Rate of Return *Estimated


Normal Cost Increase - Miscellaneous

384

749 772

231

44 6 2

1133

1003

52 0 0 0 0

0

200

400

600

800

1000

1200

0-1% 1-2% 2-3% 3-4% 4-5% 5-6% 6%+

Num

ber o

f Rat

e Plan

s

Normal Cost Increase Distribution

7%7.25%


Normal Cost Increase - Safety

66 99

154

373

224

81

17

165

527

322

0 0 0 0 0

100

200

300

400

500

600

0-1% 1-2% 2-3% 3-4% 4-5% 5-6% 6%+

Num

ber o

f Rat

e Plan

s

Normal Cost Increase Distribution

7%7.25%


5th Year UAL* - Miscellaneous

1 15

323

511

208

159

50

1

339

511

304

46 17

44 7 0

0

100

200

300

400

500

600

0-15% 15-20% 20-30% 30-40% 40-50% 50-100% 100-500% 500%+

Num

ber o

f Rat

e Plan

s

5th Year UAL Payment Increase Distribution Percentage increase based on the current UAL payment, not a percentage of payroll.

7%7.25%

*Unfunded accrued liability


5th Year UAL - Safety

1 5

165

258

85

29 8 0

171

258

106

8 0 8 0 0 0

50

100

150

200

250

300

0-15% 15-20% 20-30% 30-40% 40-50% 50-100% 100-500% 500%+

Num

ber o

f Rat

e Plan

s

5th Year UAL Payment Increase Distribution Percentage increase based on the current UAL payment, not a percentage of payroll.

7%7.25%


Lowering the Assumed Rate of Return Increases Normal Cost

• Below are employer normal cost as a percent of payroll, at various assumed rates of return for sample miscellaneous and safety plans with classic formulas.

Classic Normal Cost Comparison

Plan 7.50% 7.25% 7.00%

Miscellaneous Plan A 8.73% 9.75% 10.77% Miscellaneous Plan B 8.24% 9.18% 10.12% Safety Plan A 16.00% 17.93% 19.85% Safety Plan B 16.23% 18.08% 19.92%


PEPRA Normal Cost Comparison • Lowering the assumed rate of return increases normal cost as a percent of payroll,

which will increase member contributions under PEPRA.

Average Misc. Plan 7.50% 7.25% 7.00% Employer 6.12% 6.51% 7.15% Employee 6.25% 6.75% 7.00% Total 12.37% 13.26% 14.15%

Average Safety Plan 7.50% 7.25% 7.00% Employer 11.45% 12.40% 13.10% Employee 11.50% 12.25% 13.25% Total 22.95% 24.65% 26.35%


Timing

• Phase-in of costs • Valuation


Smoothed Amortization of UAL Contributions Based on 7.0% Assumed Rate of Return

0%

1%

1%

2%

2%

3%

3%

4%

4%

5%

5%

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21

State Plans Combined

Percent of Payroll


Timing of Change to Annual Valuations Valuation Date Contribution Rate Change

State and Schools 6/30/16 17/18 Public Agencies 6/30/16 18/19 Affiliate Plans 6/30/16 17/18


Benefits of Reducing the Assumed Rate of Return • Strengthens long-term sustainability of the fund to pay

promised benefits • Reduces negative cash flow; additional contributions will

help to offset growing pension payments • Reduces the long-term chances of falling below a 50% or

60% funded status that would weaken the sustainability of the fund

• Improves our chances of earning our assumed rate of return


Appendix Slides • State and School

- Funded Status - Rates

• November Follow-up - Stakeholder Outreach - NASRA Assumed Rate of Return Trends

• CalPERS Historical Allocation Assumed Rate of Return and 10yr US Treasury Yield

• Definitions


Sample Large Plans

70%

77% 75%

62%

68% 73%

68%

75% 73%

59%

66% 70%

66%

73% 71%

58%

64% 68%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

State Misc. Schools PA Misc. CHP State POFF PA Safety

Funded Status at Different Assumed Rates of Return

7.50%

7.25%

7.00%

Assumed Rate of Return


State and School Normal Cost

Employer Normal Cost

7.50% 7.25% 7.00%

State Miscellaneous 8.7% 9.8% 10.8%

State Industrial 10.2% 11.3% 12.4%

State Safety 11.3% 12.4% 13.6%

State POFF 16.2% 18.1% 19.9%

CHP 16.0% 17.9% 19.9%

Schools 8.2% 9.2% 10.1%


State and Schools UAL Increase with 7.25% Assumed Rate of Return

Unfunded Liability Increase

Total 1st Year Payment 5th Year Payment

State Miscellaneous $ 2,964,121,000 $ 16,191,000 $ 263,420,000

State Industrial $ 124,582,000 $ 1,432,000 $ 12,138,000

State Safety $ 344,950,000 $ 3,358,000 $ 33,621,000

State POFF $ 1,372,849,000 $ 8,558,000 $ 124,875,000

CHP $ 383,755,000 $ 1,331,000 $ 33,482,000

State $ 5,190,256,000 $ 30,870,000 $ 467,536,000

Schools $ 2,379,715,000 $ 31,312,000 $ 222,739,000


State and Schools UAL Increase with 7.0% Assumed Rate of Return

Unfunded Liability Increase

Total 1st Year Payment 5th Year Payment

State Miscellaneous $ 5,928,242,000 $ 32,381,000 $ 526,841,000

State Industrial $ 249,164,000 $ 2,864,000 $ 24,276,000

State Safety $ 689,900,000 $ 6,716,000 $ 67,241,000

State POFF $ 2,745,698,000 $ 17,117,000 $ 249,750,000

CHP $ 767,509,000 $ 2,663,000 $ 66,964,000

State $ 10,380,512,000 $ 61,741,000 $ 935,072,000

Schools $ 4,759,429,000 $ 62,624,000 $ 445,477,000


Stakeholder Outreach Since November • Surveyed school employers for input

- Questions designed to elicit level of awareness, preparation, risk tolerance and preferences related to potential assumed rate of return reduction

- 259 school employers provided responses • Meetings and engagements with stakeholders:

- Member association leaders - Retiree association leaders - Employer association leaders


School Employer Associations Surveyed

• Association of California School Administrators • California School Boards Association • California Association of School Business Officials • Small School Districts Association • School Employers Association of California


Awareness • 56% of respondents are following the discussions on

market impact on CalPERS’ investment performance • Some level of planning for higher rates through

forecasting future budgets


Financial Readiness

• How are schools financially preparing in anticipation of an increase in future contribution rates? - 64% Budget forecasting out three & five years - 24% Considering a pre-funding trust - 6% Pre-funding a trust already - 4% Considering making additional payments to CalPERS - 7% Other


School Employers’ Priorities

• 78% of employers said most important is reducing volatility of contribution rates - 13% - Risk Mitigation - 9% - Maximize Returns

28

Risk Mitigation

13%

Reduce Volatility

78%

Maximize Returns

9%


Impact of Assumed Rate of Return Decrease in Next 12 Months

High 45%

Extremely High 27%

Some 28%


Phased-In Reduction vs One-Time Reduction in Assumed Rate of Return • 86% of employers favor phasing in reduction

30

Phased-In

One time

86%

14%


Stakeholder Meetings

• Meetings with key member, employer, and retiree stakeholder leaders

• Presented fiscal impacts analysis (UAL payments and normal cost) on a potential 25 and 50 basis point drop in the assumed rate of return

• Gathered feedback and input to inform December Board discussion


Members California School Employees

Association

California Professional Firefighters

American Federation of State, County & Municipal Employees

California Association of Highway Patrolmen

CAL FIRE Local 2881

Peace Officers Research Association of California

Employers League of California Cities

California State Association of Counties

California County Superintendents Educational Services Association

California School Boards Association

California Special Districts Association

Rural County Representatives of California

Small School Districts Association

Association of California School Administrators

Retirees

California State Retirees

Retired Public Employees Association

California School Employees Association – Retirees

CAL FIRE Local 2881 - Retirees


Member Association Feedback

• Uncertainty around multiple factors impacting public employees at Federal, state, and local levels

• Preference for shared negotiation of timelines and rates with all stakeholder parties

• Preference for a long-term focused plan instead of incremental approaches and revisiting of policies


Retiree Association Feedback

• Long-term sustainability of the fund for current and future retirees is paramount

• Review of asset allocation to address shifting investment environment

• Concern for public agency employers who are struggling financially to make contributions and continue paying benefits


Employer Association Feedback

• Recognize cost impacts but understand necessity to take action

• Seek data on the positive effect that lowering the assumed rate of return will have for the System and stakeholders

• Flexibility for employers who may be financially unable to withstand increase employer contribution requirements


Assumed Rates of Return are Trending Downward

42

66

85

61

0

10

20

30

40

50

60

70

80

90

2012 Current

Less than or equalto 7.5%Greater than 7.5%

Assumed Rates of Return Above & Below 7.5%

7.5% Median

Discount Rate

8.0% 2012 Median

Assumed Rate Of Return

7.5% Current Median Assumed Rate

of return

59 Assumed Rate

of Return

Since 2012

Based on 2016 NASRA Survey


Assumed Rates of Return are Trending Downward

0 3

5

44

7 5

8

19

27

0 0

5

10

15

20

25

30

35

40

45

50

<7% 7-7.25% 7.26-7.50% 7.51-8% >8%

Num

ber o

f Plan

s

Assumed Rate of Rate

2012Latest

Distribution of the Change in Investment Return Assumptions

Based on 2016 NASRA Survey


CalPERS Historical Allocation Assumed Rate of Return and 10yr US Treasury Yield

0%

2%

4%

6%

8%

10%

12%

14%

16%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Asse

t Allo

catio

n

Cash Real Asset Private Equity Public Equity Inflation Fixed Income Discount Rate (LHS) 10 year Treasury (LHS)• Data Source: CalPERS Comprehensive Annual Financial Reports (CAFR) for assumed rate of return and allocation • Data Source: Bloomberg for 10YR US Treasury Constant Maturity Rate (H15T10Y) • Inflation asset class was not provided as a separate line item in the 2014 & 2015 CAFRs. Used the asset allocations from

the AA-Spreadsheet

Assumed Rate of Return


Monte Carlo Return Simulations – PCA

Scenario Arithmetic Return

Standard Deviation

Probability Above 6.5%, 10yr Horizon



Interim AA with PCA CMAs, no cash flows 7% 11.7% 50% 44% 39%

Interim AA with PCA CMAs, with net actuarial cash flows

7% 11.7% 25% 21% 18%

Strategic with PCA CMAs, no cash flows 7.4% 12.3% 52% 48% 43%

Strategic with PCA CMAs, with net actuarial cash flows

7.4% 12.3% 29% 26% 22%

• Simulations using PCA CMA information with and without net actuarial cash flow information.


Monte Carlo Return Simulations – Wilshire

Scenario Arithmetic Return

Standard Deviation




Interim AA with Wilshire CMAs, no cash flows 6.44% 11.41% 44% 39% 34%

Interim AA with Wilshire CMAs, with net actuarial cash flows

6.44% 11.41% 20% 17% 14%

Strategic with Wilshire CMAs, no cash flows 6.87% 12.56% 46% 42% 37%

Strategic with Wilshire CMAs, with net actuarial cash flows

6.87% 12.56% 26% 22% 19%

• Simulations using Wilshire CMA information with and without net actuarial cash flow information.


Definitions

• Normal costs - The annual cost of service accrual for the upcoming fiscal year for active

employees. The normal cost should be viewed as the long-term contribution rate.

• Unfunded accrued liability (UAL) - When a plan or pool’s Actuarial Value of Assets is less than its Accrued

Liability, the difference is the plan or pool’s Unfunded Liability. If the Unfunded Liability is positive, the plan or pool will have to pay contributions exceeding the Normal Cost.


Workshop: Securing CalPERS’ Future...2011-2012. 2012-2013. 2013-2014. 2014-2015. 2015-2016....

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Transcript of Workshop: Securing CalPERS’ Future...2011-2012. 2012-2013. 2013-2014. 2014-2015. 2015-2016....