CalPERS Update and Path Forward

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1 CalPERS Update and Path Forward Kelly Fox, Chief, Stakeholder Relations December 13, 2017 League of California Cities Fire Chiefs

2 Facts & Figures 2

3 CalPERS Retirement Benefits 3

4 3,000+ employers 4

5 Financial Highlights Current Value $335 billion 11.20% 2016/17 Portfolio Return 8.83% 5-yr Annualized Return 4.39% 6.60% 10-yr Annualized Return 20-yr Annualized Return 8.40% Annualized Return Since

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7 $20.5 billion paid in annual retirement benefits 7

8 How are CalPERS Retirement Benefits Funded? 8

9 Role Clarity 9

10 10

11 Employees CalPERS Pension Employer 11

12 What Goes into Employer Contribution Rates Member Information Benefit Provisions Actuarial Assumptions and Methods $ % Calculations Actuarial Valuation Report Actual Experience 12

13 Past and Present 13

14 Funded Status 14

15 OPTION 1 CalPERS Historic Asset Allocation Discount Rate (%) FY , ending June 30 Asset Allocation (%) 16% 14% 12% 10% 8% 10-yr Treasury Yield CalPERS Discount Rate 100% 80% 60% Fixed Income Inflation Public Equity 6% 40% 4% 20% Private Equity 2% 0% PERF 10-yr Rolling Return 0% Real Assets Cash ʼ61 ʼ63 ʼ65 ʼ67 ʼ69 ʼ71 ʼ73 ʼ75 ʼ77 ʼ79 ʼ81 ʼ83 ʼ85 ʼ87 ʼ89 ʼ91 ʼ93 ʼ95 ʼ97 ʼ99 ʼ01 ʼ03 ʼ05 ʼ07 ʼ09 ʼ11 ʼ13 ʼ15 15

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17 Members (Thousands) Dependency Ratio Ratio of Actives to Retirees 3.0 3, ,000 2,500 2, , , CalPERS Actives CalPERS Retirees NASRA Public Fund Survey CalPERS 17

18 Average Monthly Pension Benefits 2016 $2, $1, $- $ $1, $1, $2, $2, $3,

19 Male and Female Life Expectancy at Age 55 for Healthy Recipients 19

20 Future 20

21 2014 vs 2017 Capital Market Assumptions

22 2017 Capital Market Assumptions Asset Class Global Equity 8.14% Private Equity 11.26% Fixed Income 3.21% Real Assets 6.49% Inflation Assets 3.08% Liquidity 2.0% 60 Year Projected Returns

23 Public Agency Contribution Increases Normal Cost UAL Payments FY Impact Misc. Plans Safety Plans Misc. Plans Safety Plans % % 0.5% % 2% - 3% 2% - 3% % - 1.5% 1.0% - 2.5% 4% - 6% 4% - 6% % - 3.0% 2.0% - 5.0% 10% - 15% 10% - 15% % - 3.0% 2.0% - 5.0% 15% - 20% 15% - 20% % - 3.0% 2.0% - 5.0% 20% - 25% 20% - 25% % - 3.0% 2.0% - 5.0% 25% - 30% 25% - 30% % - 3.0% 2.0% - 5.0% 30% - 40% 30% - 40% 23

24 24 Sample Actuarial Valuation: Safety Plan for Large City

25 Future Relief PEPRA Impacts Nearly 241,000 (~30%of public employees) hired since January 1, 2013 Pension savings of $29 $38 billion over next 30 years Pensionable compensation caps on salary: $118,775 for Social Security participants $142,530 for non-social Security participants 25

26 Policy Decisions 26

27 Candidate Portfolios

28 Discount Rate Determination Based on Blended CMA rates and projected Cash Flows Portfolio Discount Rate Portfolio Volatility A 6.50% 9.1% B 6.75% 10.2% C 7.00% 11.4% D 7.25% 12.8%

29 Average Employer Contribution Rates For 30 Years By Portfolio 29

30 Asset Allocation Challenges Valuation Metrics vs. Historical Range A Measure of Risk (as of September 2017) Source: Pension Consulting Alliance

31 Amortization Policy - 30 Year (Current) 31

32 Proposed Actuarial Amortization Policy: 20 Years For Gains & Losses 32

33 Asset Liability Management (ALM) Process Jan Educational Workshop: Public Access Nov Experience Study & Educational Workshop: Candidate Portfolios Dec Board to Adopt ALM Changes Feb Board to decide on Amortization policy Apr Educational Workshop: Private Assets Jun Approval of Capital Market & Economic Assumptions Jul Fiscal Year Investment Returns Announced & Educational Workshop: Leverage Oct CalPERS Educational Forum Jul Implementation of Board Decisions 33

34 Considerations Pension prefunding options for employers CalPERS focus: reducing costs & complexity, fund sustainability Vested rights issue in County and Firefighter cases with State supreme court Stakeholder engagement with Board and executive team Public policy efforts and debate likely forthcoming 34

35 Appendix

36 2017 Capital Market Assumptions

37 Scenario Analysis (Global Financial Crisis & Recovery) 37

38 Investment Gain or Loss ($1,000,000 Loss)

39 Definitions Asset Liability Management (ALM) An integrated look at our assets and liabilities to determine the right mix of investments for our portfolio, specifically designed to achieve a sound and sustainable fund. Done on a rolling 4-year cycle. Discount Rate Also known as the assumed rate of return. It is what we assume our $304 billion in investments will return in a typical fiscal year, July 1 to June 30. Normal Cost The annual cost of service accrual for the upcoming fiscal year for active employees. The normal cost should be viewed as the long term contribution rate. Risk Mitigation Policy A mechanism that triggers adjustments to strategic asset allocations and reduces discount rate by a set amount when returns exceed a certain threshold. Temporarily suspended. Unfunded Liability / Unfunded Actuarial Accrued Liability (UAL) When a plan or pool s Market Value of Assets is less than its Accrued Liability, the difference is the plan or pool s Unfunded Liability. If the Unfunded Liability is positive, the plan or pool will have to pay contributions exceeding the Normal Cost.