CalPERS Update

1. CalPERS Update David Lamoureux CalPERS Deputy Chief Actuary

2. Agenda • GASB 68 – What is CalPERS Planning to Do • Changes to Smoothing and Amortization Methods • What’s Happening at CalPERS CalPERS Update

3. GASB 68 – What is CalPERS Planning to Do

4. CalPERS Update

5. New GASB Standards • GASB Statement No. 67 • Applies to plans (CalPERS) • Replaces GASB Statements No. 25 • GASB Statement No. 68 • Applies to employers • Replaces GASB Statements No. 27 CalPERS Update

6. Will CalPERS Provide GASB 68 Information? • Planning on it • Will require extensive changes • Cannot use trust fund money CalPERS Update

7. Fee for GASB Valuation • CalPERS Board gave approval to proceed and charge employer • GASB valuations will be done on request • Not mandatory • Fees expected to be known in fall of 2014 • Likely to be different by “pooled” vs “non-pooled” • More details to follow CalPERS Update

8. Potential GASB Implementation Issues • Need actuarial computer system re-write • Ability to hire staff • Timing of plan specific asset information • Need to be ready by spring of 2015 • Most employers will need the information for June 30, 2015 CAFR CalPERS Update

9. Potential GASB Implementation Issues • For first few years, CalPERS may not be able to provide all necessary information • Example • Cross-over calculation to determine discount rate • Employers will have to rely on outside actuarial firm if information provided by CalPERS is deemed not sufficient by their auditors CalPERS Update

10. Changes to Smoothing and Amortization Methods

11. Current Smoothing Policies • Originally adopted by Board in April 2005 • Asset Smoothing Policy • 15 year rolling smoothing period • Actuarial Value of Asset (AVA) corridor • 80%-120% of Market Value of Assets (MVA) • Amortization Policy • 30 year rolling amortization of gains and losses CalPERS Update

12. New Methods • Adopted by CalPERS Board in April 2013 • 5 year direct rate smoothing • 5 year ramp up/down • 30 year amortization of gains and losses • 5 year direct rate smoothing also applies to assumption changes • 20 year amortization with 5 year ramp up/down • Automatic smoothing of assumption changes CalPERS Update

13. Current Method vs. New Method CalPERS Update

14. Current Method vs. New Method CalPERS Update

15. Assessment of New Methods • What we like: • Less volatility in extreme years • Faster improvement in funded status • Transparency of future contribution requirement • Only one asset value; only one unfunded liability • GASB e.g. cross over calculation • What we don’t like • More volatility in rates in normal years CalPERS Update

16. Impact of New Methods • No impact on normal cost • Will impact employer contribution rates for the first time in 2015-2016 • Higher contributions short term but lower contributions long term (25 + years) with savings over the long term • Better funded status long term • Impact is included in valuation report CalPERS Update

17. What’s Happening at CalPERS

18. Review Of Asset Allocation • Board reviews asset allocation every 3 years • Asset liability workshop scheduled on November 12th and 13th • Final asset allocation will be adopted in December 2013 • Implications are potential changes to discount rate assumption • Would be adopted in February 2014 CalPERS Update

19. Discount Rate • Two issues • Is the expected return too high? • Should we include a margin for conservatism in the discount rate to discount liabilities? • Board decision expected in February 2014 CalPERS Update

20. Review of Actuarial Assumptions • Review of demographic and economic assumptions • Once every 4 years • Work currently under way CalPERS Update

21. Mortality Improvements • Study is showing that life expectancy has improved again the last 4 years • Discussion taking place on how much future improvements should be assumed • Improvements needed to properly fund the system • Actuarial Standards of Practice • Expected to result in higher contribution requirements • October Board workshop CalPERS Update

22. CalPERS Update

23. CalPERS Update

24. Potential Impact • Change in demographic assumptions will impact normal cost • Could result in higher member contribution for PEPRA members • Mortality projection • Impact will depend on how much mortality improvements is assumed • Impact will be phased-in over 5 years as per new smoothing policies CalPERS Update

25. Potential Impact * Based on a sample of 10 plans. CalPERS Update

26. Key Dates • November 12 and 13, 2013 • Asset Liability Workshop • December 2013 • Board adoption of new asset allocation • Preliminary recommendations for new actuarial assumptions • Economics • Demographics CalPERS Update

27. Key Dates • February 2014 • Final adoption of actuarial assumptions • If changes are made, would impact 2013 valuation setting 2015-2016 rates or the 2014 valuation setting the 2016-2017 rates http://www.calpers.ca.gov/eip-docs/about/press/news/invest-corp/timeline.pdf CalPERS Update

28. PEPRA– Risk Pool Impact • CalPERS Board created two new risk pools • Miscellaneous 2% at 62 • Safety 2.7% at 57, 2.5% at 57 and 2% at 57 • Existing Pools are closed to new entrants • Need to address amortization of side funds and pool unfunded liability • Looking at various solutions • Discussion will take plan at November Board meeting • Board decision is expected next spring CalPERS Update

29. PEPRA – Excessive Compensation • PEPRA includes a provision on excessive compensation • Intent is for employers granting “excessive compensation” to pay for the increase in actuarial liabilities it may have caused to other employers • Looking at proposed regulations in Summer 2014 CalPERS Update

30. Funding Risk • Funding Risk report in March • Actuarial valuation reports all include a risk analysis section: • Discount Rate Sensitivity Analysis • Employer rate under different discount rate • 6.5% and 8.5% discount rate • Investment Return Sensitivity analysis • Projection of employer rate up to 2019-2020 • 5 scenarios CalPERS Update

31. Questions?