The CalPERS Pension Buck illustrates the sources of income that fund public employee pensions. Based on a 20-year average ending June 30, 2024, for every dollar CalPERS pays in pensions: 55 cents come from investment earnings, 34 cents come from employer contributions, and 11 cents come from employee contributions.
For years, we’ve used the Pension Buck as a visual shorthand for the partnership between CalPERS members, their employers, and our pension fund investments. We’ve just updated it to reflect the latest numbers.
Investment earnings not only make up the largest share of CalPERS retiree payments, but they also have an impact on the size of contributions made by employers.
The relationship between those two funding sources is at the heart of a key question under discussion by the CalPERS Board of Administration: What’s the appropriate target for CalPERS’ long-term returns?
CalPERS Board Considers Funding Risks
At issue is the CalPERS Funding Risk Mitigation Policy, the plan that governs how any single year’s investment returns impact CalPERS’ long-term discount rate.
The discount rate is similar to an assumed rate of return, though it also can be viewed as a way to assess the portfolio’s level of risk.
A lower discount rate can soften the blow when investment returns stumble. But it also means more of the Pension Buck must be covered by employers. (Costs for members, however, are generally less dependent on these factors.)
Discussions about the Funding Risk Mitigation Policy began in July, when CalPERS announced a preliminary 9.3% investment return for the 2023-24 fiscal year, pushing the overall funded status up to 75% and easing some of the financial pressures on employers from recent years where returns struggled.
The Funding Risk Mitigation Policy, which was suspended from 2017 to 2020, formally links the discount rate to investment returns. When returns beat the discount rate by 2% or more, the policy prompts discussion on a possible rate reduction.
In 2021, the pension fund reported a 21.3% investment return, automatically triggering a decrease in the discount rate from 7% to 6.8%. The 2023-24 investment return would have triggered another cut to the discount rate.
A Policy Change and More to Come
But the board intervened in April, removing the automatic cut to the discount rate from the Funding Risk Mitigation Policy and choosing instead to make case-by-case decisions, given the impact on state, local, and school budgets.
In September, board members used their new discretion to leave the discount rate at 6.8%.
But this isn’t the end of the story. Discussion of the discount rate will be folded into next year’s review of CalPERS’ Asset Liability Management (ALM) process. Those discussions begin in January and will include an analysis of both the investment portfolios and retirement plan liabilities. The ALM process sets in place a road map for the next four years, and it may be among the most important CalPERS topics to watch for in 2025.