1. Pension Funding Risks & Possible Method Changes Alan Milligan Chief Actuary

2. Agenda What’s happening? Discussion of funding risks Possible changes to funding methods Impact on contribution rates 2

3. What’s Happening?

4. Accounting Changes 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 4

5. Highlights of GASB 68 Accounting ≠ Funding Have to Report Unfunded Liability on Balance Sheet - Using market (fair) value of assets Pension expenses no longer the ARC - Based on shorter amortization periods - Very volatile Pooled Employers will have to report their share of the pool’s UAL and pension expense 5

6. Will CalPERS Provide the Information? Planning on it Will require extensive changes Cannot use trust fund money Will have to charge employers asking for the information Will be going to CalPERS Board this spring for approval to proceed and charge employer - GASB valuations will be done on request - Not mandatory 6

7. Potential GASB Implementation Issues Need actuarial computer system re-write Ability to hire staff Need to be ready by spring of 2015 - Most employers will need the information for June 30, 2015 CAFR 7

8. Pension Reform Its here! Best source of up to date info is CalPERS website - FAQ, circular letters, member publications PEPRA rate letters were sent in December - New PEPRA employer rate for pooled plans - Blended rate for non-pooled plans 8

9. Pension Reform – Clean Up CalPERS is pursuing regulations Clean up Legislation (SB 13) - Issues Special compensation Contribution and benefit offsets 9

10. Pension Reform – Employer Inquiries MOU impairment Working after retirement Member rate, EPMC Compensation cap - Will be stopping contribution above cap - System changes needed - Expected to be in place by end of June at the latest 10

11. Pension Reform – 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 11

12. Total Normal Cost Miscellaneous Plans 12 Benefit FormulaLowMedianHighCurrent Employee Contribution 2% at Age 6013.9% 15.9%7% 2% at Age 5515.6%16.1%18.8%7% 2.5% at Age 5517.8%18.3%20.4%8% 2.7% at Age 5519.0%19.7%22.5%8% 3% at Age 6019.5%20.2%22.4%8% 2% at Age 6212%?

13. Total Normal Cost Safety Plans 13 Benefit FormulaLowMedianHighCurrent Employee Contribution 2% at Age 5520.7% 22.6%7% 2% at Age 5024.3% 28.5%9% 3% at Age 5526.4%27.3%31.0%9% 3% at Age 5028.7%29.6%37.3%9% 2% at Age 5717%? 2.7% at Age 5721%?

14. Asset Allocation and Discount Rate Board reviews asset allocation every 3 years Asset liability workshop scheduled for November 2013 - Final asset allocation will be adopted in December 2013 Implications are potential changes to discount rate assumption - Would be adopted in February 2014 - Would impact 2013 valuation setting 2015-2016 rates 14

15. Experience Study Review of demographic assumptions Once every 4 years - Will work on new one in 2013. - Expect to present result in early 2014. Future mortality improvement (i.e people living longer) will be looked at - Expected to result in higher contribution requirements 15

16. Funding Risk

17. Risk Funding Risk report in March New risk analysis section in reports 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 2017-2018 - 5 scenarios 17

18. Termination Liability CalPERS Board approved new asset allocation for terminated plans in December Liabilities have been immunized using a fixed income portfolio What does it mean in today’s low interest rate environment? - Discount rate is much lower - Termination liabilities much higher than funding liabilities Hypothetical termination liability was included in most recent actuarial valuation report 18

19. Example Plan with an asset to payroll ratio (volatility index) of 6 - Assume AVA = 120% of MVA 19

20. Need some graphics 20

21. Possible Changes

22. Employer Contributions Exploring new ways to set contribution requirements Ideas - Status quo - Separate contribution rate per benefit formula - Set a rate for normal cost and bill $ for any payment toward an unfunded liability (and side fund) - Set a $ amount each year 22

23. Review of Smoothing and Amortization Methods CalPERS actuarial staff performing a review of existing methods - 15 year asset smoothing - 30 year rolling amortization Results of review will be presented in March Potential for a recommendation to shorten asset smoothing period and/or amortization period 23

24. Issues with the Current Methods 24

25. The Concept No corridor Shorter (fixed) smoothing period Fixed amortization periods Smoothing the rate directly 25

26. Directly Smoothing the Rate? 26

27. Graph of Contribution Rate UAL pmt, single asset loss/ current versus new concept 27

28. Impact on Employer Contributions

29. Accounting Changes No impact on employer contributions Will impact pension expense on your financial statements 29

30. Pension Reform No impact at start Gradual phase in of lower normal cost - As you hire new employees Member contribution rate increases - Direct offset if/when implemented - Consult your actuary as to timing 30

31. New Assumptions Expect to recommend changes in early 2014 May be effective for 2015-16 or 2016-17 Mortality projection - Impact of a 1% change is shown in your valuation report Discount rate - Impact is 2% to 4% of payroll 31

32. New Smoothing Methods Timing Impact 32

33. Timeline of Pension Changes 33 Impact on Rates* 2012 2013 2014201520162017 GASB AB340 Assumption Change Method Change Impact on Rates* *For illustrative purposes only No impact on rates Applies to Fiscal years beginning after June 15, 2014 for most Employers Information needed Fall 2015 Impacts rates of new Employees when hired (or shorty thereafter) Impacts FY 2015-16 rates Impacts discount rate in Valuations Impacts mortality projections in the presentation Impacts FY 2015-16 rates Approval

34. QUESTIONS?