By @Aaron Avery
On February 20, the California Public Employees' Retirement System (CalPERS) Board of Administration will consider an information item concerning its Funding Risk Mitigation Policy. This policy implements the CalPERS belief that the discount rate - essentially, the expected rate of return of the fund - should be decreased over time.
The purpose of the Funding Risk Mitigation Policy is to use savings achieved in “good years” to “buy down” the system’s discount rate. This also may lead to a reallocation of assets. Lowering the discount rate generally results in increased costs for CalPERS employers and some employees. The policy attempts to offset increased liabilities, to the extent possible, by lowering the discount rate in conjunction with investment gains.
CalPERS’ Funding Risk Mitigation Policy was last triggered in 2021 when the retirement system achieved an investment return in excess of 21 percent, resulting in a reduction of the discount rate to the current 6.8 percent. That discount rate was later affirmed and maintained by CalPERS through the CalPERS Asset Liability Management policy (ALM) process.
According to the CalPERS Agenda:
This item will provide the Finance and Administration Committee an overview of the Funding Risk Mitigation Policy. This February item will serve as a first read, upon committee direction, the team will return in April for a second reading for the board to take action and approve proposed revisions.
This agenda item provides an educational overview of the policy, providing the following:
- History and purpose
- Conditions for triggering
- Timing and sequence for implementing
- Impact of the policy on the asset liability management process
- Seeks feedback from the board and stakeholders for proposed revisions
Although the current 6.8 percent discount rate is not explicitly the topic of the information item, it is anticipated that it may be discussed. With respect to the Funding Risk Mitigation Policy, it is anticipated that CalPERS may consider keeping the policy, eliminating the policy, or modifying the policy. Additional information may be viewed here and here.
Various committees and the Board of Administration are meeting from February 20 – February 21. Copies of the agenda for each day, and supporting documents, can be found on the CalPERS website: https://www.calpers.ca.gov/page/about/board/board-meetings. There will be an opportunity for public comment, including from special district stakeholders.
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