CalPERS revises automatic discount rate reduction

By Johnnie Pina, legislative affairs lobbyist

The CalPERS Board of Administration voted last month to revise a policy that automatically increases employer contributions during unexpected market surges. The Funding Risk Mitigation Policy automatically reduces the pension fund's expected investment return and discount rate - the long-term interest rate used to fund future pension benefits - in years of unanticipated market strength.

Cal Cities supported the amendments and provided public comment on why the update was needed. First approved in 2015, CalPERS adopted the policy with the intent of helping balance pension plan risks, funding, and costs. While the intent is appreciated, changes to the discount rate and the resulting increase in costs could impose a serious hardship for many cities.

In its testimony, Cal Cities noted that adjustment to the discount rate merits a discussion of the Board and stakeholders should have the opportunity to participate in the decision.

The amendments removed the automatic discount rate reduction. The policy now requires a Board discussion if the assumed rate of return exceeds 2%. The Board could still choose to reduce the discount rate. However, the amendments put the decision-making authority back in the hands of the Board and opened the process up for stakeholder engagement.

In addition to the Funding Risk Mitigation Policy, the CalPERS Board also reviews the discount rate as a part of CalPERS' Asset Liability Management process. This recurring, integrated review of its assets and liabilities informs CalPERS' decisions and helps create a sustainable pension fund. More information about the most recent CalPERS board meeting is available online.