CalPERS Adopts New Demographic Assumptions

Specifically, CalPERS’ Board approved new demographic assumptions that take into account public employees living longer based on a recent study of CalPERS membership. Findings show men are expected to live two more years than previously expected, and women a year and a half longer. The study also shows higher rates of retirement for certain member groups, including police officers and firefighters. These new assumptions will raise employer pension costs in the future.

The Board adopted staff’s recommendation for local public agencies and school districts to implement costs in the 2016-17 fiscal year, with the expense spread over 20 years and the increases phased in over five years. The Board also voted to approve implementing the increases for the State beginning in the 2014-15 fiscal year, with the cost spread over 20 years and the increases phased in over three years.

CalPERS staff estimate the local governments could see costs rise up to 5% of payroll for average state employees and up to 9% of payroll for safety classifications in year five of the phase in. The State of California is expected to pay $1.2 billion more at the end of the three year period. The State currently pays approximately $3.8 billion for state employee pensions.

Adoption of the new assumptions marks the third change in factors that impact the long-term funding of the system. In March 2012, the pension fund lowered its discount rate from 7.75% to 7.5% citing economic conditions (see “CalPERS Lowers Return Assumption”). A year later, CalPERS changed its policies to recognize gains and losses over a shorter period and to use a 30-year fixed amortization period instead of a rolling 30-year period (see “CalPERS Approves Plan to Improve Funding”).

The Board also adopted an asset-allocation mix that lowers investment risk but largely keeps its investment strategy unchanged, holding the fund’s long-term assumed rate of return at 7.5%. CalPERS investment portfolio will have a target allocation of 47% to equities, 19% to fixed income, 6% to the inflation-sensitive securities, 12% to private equity, 11% to real estate, 3% to infrastructure and forestland, and 2% to liquidity.

CalPERS is the largest public pension fund in the U.S., with more than $277 billion in assets.