By Ed Mendel
Monday, February 25, 2013

CalPERS last week gave some 1,575 local governments a small increase in their annual pension costs, one of the last rates kept low by unusual actuarial policies adopted after a $100 billion investment loss five years ago.

As a slowly improving economy bolsters government budgets, CalPERS is considering changes in investment and actuarial policies that could “turn on the spigot” over the next few years, requiring employers to put more money into the pension fund.

CalPERS funding levels are low, around 70 percent. Officials fear another big investment loss could require unworkable rate hikes to get to 100 percent funding. So a risk-based investment policy is being considered to cut losses in future downturns.

The level of the big CalPERS state worker fund is projected to drop to 60 percent in 50 years, even if earnings average 7.5 percent. Proposed actuarial changes would boost funding levels, avoid conflicting debt reports and make employer rates more predictable.

Did keeping a lid on rates put the system in jeopardy to avoid a rate shock that could trigger sweeping reform? Or were government budget cuts prudently eased during a financial crisis by a flexible pension system with a long recovery time?

Whatever the case, twin processes that could result in CalPERS board approval of major policy changes later this year are being led by Joe Dear, the chief investment officer, and Alan Milligan, the chief actuary.

The board is scheduled to consider “capital market assumptions” in May and a risk-based “decision framework” for investments in July. The goal is to adopt a new asset allocation while the economy is relatively good.

“We face higher rates if we do reduce the portfolio return,” Dear told the board last week. “As the charts indicate, this draw-down risk is absolutely associated with the portfolio risk we run with the exposure to growth in the portfolio, and when growth is good the portfolio does well.”

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