Employee Relations 03/22/2013
CalPERS Proposes to Modify Amortization and Smoothing Policies
The California Public Employees’ Retirement System (CalPERS) has
accepted a staff recommendation to modify the actuarial polices
used to set employer contribution rates. The policy changes were
adopted as a “first read” and will be considered in further
detail in April.
CalPERS currently achieves smoothing using two approaches, one that uses the actual market value of assets and the other that uses the actuarial value of the fund. These two approaches produce two values of an employer’s unfunded liability which often leads to confusion. CalPERS proposes to use a direct smoothing method in the future that will shorten asset smoothing and amortization periods and provide a single value of assets. The proposed direct smoothing method will likely result in more employer rate volatility in “normal” years, but less volatility in extreme years like those experienced after the 2008 market decline.
CalPERS staff state that the proposed method will result in an increased likelihood of higher employer contributions levels in the future. The reason for this proposed change is that over time, the proposed methods are expected to result in improved funding levels and reduced funding level risk. CalPERS’ staff have become increasingly concerned that current funding levels are too vulnerable should there be another serious economic downturn in the market.
Counties should expect to see rate increases as a result of these changes starting in the 2015-2016 year; however CalPERS staff indicates that they will begin providing the information about proposed increases in the valuation reports issued later this year. Finally, counties should also be aware that CalPERS will be looking at its other actuarial assumption is spring 2014 and will likely recommend changes related to mortality assumptions. These changes will also put an upward pressure on county pension costs.