CSAC Bulletin Article

CalPERS Board Approves 6.8% Discount Rate

November 18, 2021

This week, the CalPERS Board of Administration approved a new investment strategy that will guide the system’s mix of assets over the next five years, and in doing so chose to maintain its current 6.8 percent discount rate. The discount rate, often referenced as the assumed rate of return, is one of the main components used to calculate employer and employee contribution rates.

In July, high investment returns triggered an automatic discount rate reduction from 7 percent to 6.8 percent. This automatic reduction was the result of the Funding Risk Mitigation Policy put in place by the CalPERS Board of Directors in 2015, which was designed to lower the discount rate in years of extraordinary investment returns to reduce future funding risk over time.

This week’s action was the capstone on the CalPERS Asset Liability Management (ALM) process, which they undertake every five years. During the last ALM process, CalPERS reduced the discount rate to 7 percent from 7.5 percent and instituted the risk mitigation policy described above. That reduction increased required contributions, since pensions must be funded either by contributions or investment returns. The discount rate reduction triggered this summer will not result in increased contributions, since those costs are covered by the investment returns.

The investment strategy CalPERS approved this week will decrease reliance on domestic public equities, increase investments in private equity, and add 5 percent leverage to increase diversification and better shield the fund from negative impact during economic downturns.

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