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?