CalPERS Earnings Confirm Discount Rate Reduction
July 15, 2021
CalPERS earned 21.3 percent returns on its investments during the 2020-21 fiscal year, according to their preliminary announcement earlier this week. While the news is welcome for employers, since higher returns result in lower rates, the earnings also trigger a new policy for the first time that will reduce the discount rate—or assumed rate of investment returns—from 7 percent to 6.8 percent, as previously reported in the CSAC Bulletin last month. Even with the lower discount rate, the system’s funded status has risen sharply from 71 percent to 80 percent.
The combined result for public employers that are members of CalPERS, all things being equal, is lower rates due to the investment returns, but not as low as they would have been, due to the reduced discount rate. In essence, the investment gains are being split roughly equally between reduced rates and a reduced discount rate.
These changes come just as CalPERS is completing its regular, but infrequent, review of its assets and liabilities (the ALM process), which could result in further changes to the discount rate. Any change to the discount rate as a result of the ALM process would be decided late this year or early next year, but would not affect local agency employer contribution rates until the 2022-23 fiscal year.