Critics Pick Their Facts but Ignore the Truth
November 21, 2017
Two serial critics of defined benefit plans have recently published comments that selectively mine the facts so they can advance their anti-pension platforms.
Taking the long view
Pellissier, who represents a group called California Pension Reform, says that when CalPERS board members agreed to gradually lower the discount rate to 7 percent they ignored outside experts who expect a 6.2 percent average return over the next 10 years.
Pellissier has chosen to ignore the rest of the story. The 10-year return is an important part in deciding the discount rate — what we believe our investments will return over the long term, but it's only a part.
CalPERS pays pensions for decades to come. Our Investment Office and actuaries must take into account carefully considered projections 10 years … and beyond. In fact, the new investment portfolios and asset allocation mix the CalPERS Board is considering, looks at returns over the next 60 years.
The current 7 percent discount rate, which is being implemented over the next three years, blends short term, 10-year forecasts with long-term projections in years 11 through 60.
Our investment portfolio has seen positive returns every year since 2010. In three of the eight fiscal years since then, we fell short of the discount rate with returns of 0.1 percent, 2.4 percent, and 0.6 percent. We handily beat it in the other five: 13.3 percent, 21.7 percent, 13.2 percent, 18.4 percent and 11.2 percent.
Put another way: Despite market volatility, since 1988, when the construction of the current CalPERS portfolio began, our returns have averaged 8.4 percent annually.
That's what we mean when we say we pay pensions over decades and we invest over decades. And that's what Pellissier so conveniently ignores.
A matter of fairness
In his article, Greenhut, Western region director for something called the "R Street Institute", complains that CalPERS is sponsoring legislation to require local agencies to notify their employees when they try to leave CalPERS. He claims it's merely a public relations ploy to avoid bad press.
Hardly. We already notify affected retirees and employees – and that won't change. But we also believe that any employer making a decision that jeopardizes the retirement security of its current and past employees should tell them as well.
We administer pension benefits on behalf of thousands of California government organizations, including the state, schools, cities, counties, and other local agencies. These organizations — the employer — decide what benefits to offer, then contract with CalPERS to administer their plans and deliver on those promises.
A decision by a government agency to no longer participate in CalPERS can trigger serious changes to the retirement agreements they have made with their employees, including retirees, who often live on fixed incomes. Without continued funding from the employer and the employee, there is nothing to invest. And since investment returns currently make up 61 cents of each dollar paid to retirees, that makes the agreement between the government agency and CalPERS hard to sustain.
To protect the other thousands of employers in the CalPERS Fund, and the retirement security of their employees, agencies that leave CalPERS are placed in a separate plan. This pool is conservatively managed to preserve as much of the assets that currently exist as possible. That's only fair.
Greenhut also argues that we should disclose to members the unfunded liability, funding status, and other fiscal data related to the health of the Fund.
News flash: We do.
Among our many regularly published investment, actuarial, and financial reports, we provide each employer an annual valuation of their plan, covering contribution rates and other important figures. Included in those reports are multi-year projections of contributions to help with planning and budgeting.
Nothing prevents an employer from sharing that information with its employees. In fact, we highly recommend it. That's why all valuations are available to view on our website, for anyone to see, at any time. Check them out.
Greenhut doesn't seem to think employers have an obligation to communicate with the employees they've made retirement promises to. He seems to think that they should get a pass when they make a decision that can have life-altering impacts to those employees.
We don't agree. We're going to keep informing our members about issues that can affect them, including ones that can drastically impact their retirement security. As a matter of fairness, we think employers should do so too.