The California Public Employees’ Retirement System, or CalPERS, board said this week it prefers to switch its investment portfolio over to a less risky, lower yielding option, but said it would like to keep the discount rate used to offset future pension costs at 7.5 percent or higher.
CalPERS, one of the largest pensions in the country, took a $100 billion investment loss during the recession. The organization has spent the last two years trying to find a way to reach full funding of its pension plans in 30 years.
It lowered the discount rate from 7.75 percent to 7.5 percent in March last year, which triggered an employer rate increase. A second rate increase was approved in April.
The new rate raises employer rates over a five-year period beginning in 2014 for the state and schools and for local government by 2015.
Critics say that even at 7.5 percent, the discount rate is too optimistic and doesn’t reflect actual returns on investment. Instead, all it does is mask pension debt. Proponents say that if the discount rate is lowered more, all it will do is make employees pay more for their own retirements. In some cases, they already are contributing 20 percent or more of their pay to retirement savings.
The next step is to revamp CalPERS’ investment allocations and demographic assumptions. The pension system needs to take into consideration that people are living longer and charge rates to cover those longer life spans. Neither decision will be made until sometime in February, according to Calpensions, a small news site that covers the California pension system.