March 14, 2012
External Affairs Branch
Robert Udall Glazier, Deputy Executive Officer
Brad Pacheco, Chief, Office of Public Affairs
Contact: Amy Norris, Information Officer
CalPERS Board Sets Discount Rate at 7.5 Percent
SACRAMENTO, CA – The California Public Employees’ Retirement System (CalPERS) Board of Administration today voted to reduce the discount rate to 7.5 percent, affirming the recommendation made by its Pension and Health Benefits Committee yesterday.
CalPERS Board also directed its Chief Actuary to analyze and bring back an option for consideration to phase in the increased pension costs to employers over a 2-year period.
The discount rate for the Public Employees’ Retirement Fund was last changed 10 years ago when it was lowered to 7.75 percent from 8.25 percent. One year ago, the Board voted to keep the discount rate at 7.75 percent with the condition of another review in 2012.
“This was a difficult, but important, decision for the Board to make. We understand the impact this will have on our employers in meeting contribution requirements,” said Rob Feckner, Board President. “However, current economic conditions impelled us to make this change now, and our actuaries will continue to evaluate the discount rate in the coming years.”
The discount rate is calculated based on expected price inflation and real rate of return. According to studies conducted by CalPERS and external actuaries, inflation has been in decline for the last 25 years. As a result, CalPERS Actuarial Office recommended a reduction in the price inflation from 3 to 2.75 percent. When added to the current real return assumption of 4.75 percent, this produces a discount rate of 7.5 percent. CalPERS actuaries offered the Pension and Health Benefits Committee two options to protect the soundness of the pension plan: a 7.25 percent discount rate that includes an adjustment to add an element of conservatism to further protect against lower returns, or a 7.5 percent discount rate without such an adjustment.
“It is important that we periodically review our assumptions to ensure that we remain focused on the long-term health of the Fund in order to protect the benefits that our members and employers rely on us to provide,” said Committee Chair Priya Mathur. “This new discount rate reflects our expectations of what the markets will deliver in the future.”
The discount rate will impact members and employers as follows:
- State and schools employer contributions will increase by 1.2 to 1.6 percent for Miscellaneous plans and 2.2 to 2.4 percent for Safety plans beginning Fiscal Year 2012-13. According to staff estimates, the change in the discount rate is expected to cost the State $303 million, of which approximately $167 million would come from the State’s general fund. The school increase would be approximately $137 million.
- Public Agency contributions will increase by 1 to 2 percent for Miscellaneous plans and 2 to 3 percent for Safety plans beginning Fiscal Year 2013-14.
- The new discount rate will apply to new service credit purchase requests postmarked, faxed or delivered on or after March 15, 2012. Costs will increase between 5 and 13 percent depending on the individual circumstances of members. Members who have submitted a request prior to March 15 will be honored with the factors in effect as of the request date.
- Retirement applications with a retirement date on or after March 15, 2012 will have the amount of their benefits under any optional form be calculated with the new discount rate. Members who choose optional benefits – leaving some part of their benefit to a spouse or beneficiary after their death – will experience approximately a 2 percent increase in cost.
CalPERS, with assets of approximately $235 billion, is the largest public pension fund in the U.S. It administers retirement benefits for more than 1.6 million California State, local government, and public school employees, retirees, and their families on behalf of more than 3,000 public employers, and health benefits for more than 1.3 million enrollees. The average CalPERS pension benefit is $2,332 per month. The average benefit for those who retired in the most recent fiscal year that ended June 30, 2011, is $3,065 per month. More information about CalPERS is available at www.calpers.ca.gov.