CalPERS Board to Discuss PEPRA’s Effect on Risk Pools

The California Public Employees’ Retirement System (CalPERS) Board of Administration (Board) next week will discuss the effect of the Public Employees’ Pension Reform Act of 2013 (PEPRA) on the fund’s active risk pools and changes that will be necessary to avoid serious underfunding of those pools.

CalPERS implemented risk pooling effective with the June 30, 2003 actuarial valuations to protect small employers (those with less than 100 active members) against large fluctuations in employer contribution rates caused by unexpected demographic events. CalPERS assigns each plan to a risk pool based on their service retirement formula.

PEPRA, by implementing new benefit formulas for new employees, effectively closed all existing active risk pools to new public employees hired on or after January 1, 2013. This has created several unintended consequences requiring attention from CalPERS. Among other issues:

• The closing of all existing active risk pools means that CalPERS can no longer assume that the payroll of the risk pools for the classic employee formulas will continue to grow at three percent per year since the number of active employees in the pools will decrease to eventually having no active employees.
• Employer contributions for pools are collected as a contribution rate expressed as a percentage of payroll; PEPRA is closing those pools to new PEPRA hires, which leads to the likelihood that payroll will increase at a rate far less than three percent annually. Smaller payroll growth in a risk pool can lead to a serious underfunding of that plan.
• The retirement or exit of active members from the plans will differ between employers due to demographic differences. This means that some plans will experience a faster decline in payroll than others. As gains and losses of the whole risk pool as well as the plan’s unfunded liability (which remains unchanged in risk pools) are allocated based on the payroll of the plan, those plans with larger payroll will have to contribute more towards their pool’s unfunded liability, leading to an inequitable apportionment of costs.

To remedy the problems associated with the interaction of PEPRA and Board policies on risk pools, CalPERS staff next Spring will recommend that the Board adopt the approach of combining all risk pools into two active pools (one for all miscellaneous groups and one for all safety groups). Doing so will allow CalPERS to continue its current level percent of pay amortization schedule and save employers of immediate contribution increases. CalPERS will also recommend changes in how employer contributions to a pool’s unfunded liability are collected and allocated to ensure equity and allow employers to pay down their share of that unfunded liability. 

CalPERS’ staff will present this issue as an informational item at the CalPERS’ Finance and Administration meeting on Tuesday, December 17 at 11am at CalPERS’ Headquarters in Sacramento. You may watch online here.