Securing CalPERS Future: Managing Funding Risks, Stakeholder

Outreach & Engagement

CalPERS Finance and Administration Committee

November 15, 2016

Agenda Item 7a, Attachment 3 Page 1 of 22

Agenda

• Why we are preparing for a low return environment • Review the changing demographics and funded status of

our plan • Recap stakeholder outreach and engagement • US pension plans discount rate trends

2

Agenda Item 7a, Attachment 3 Page 2 of 22

CalPERS Historical Allocation Discount Rate and 10yr US Treasury Yield

0%

2%

4%

6%

8%

10%

12%

14%

16%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Asse

t Allo

catio

n

Cash Real Asset Private Equity Public Equity Inflation Fixed Income Discount Rate (LHS) 10 year Treasury (LHS)• Data Source: CalPERS Comprehensive Annual Financial Reports (CAFR) for Discount rate and allocation • Data Source: Bloomberg for 10YR US Treasury Constant Maturity Rate (H15T10Y) • Inflation asset class was not provided as a separate line item in the 2014 & 2015 CAFRs. Used the asset allocations from

the AA-Spreadsheet

3

Agenda Item 7a, Attachment 3 Page 3 of 22

10-Year Expected Returns & Volatilities 2013 vs 2016 Capital Market Assumptions

0%

5%

10%

15%

20%

25%

30%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

Volat

ility

Retu

rn

2013 - Expected Volatility (Right) 2016 - Expected Volatility (Right) 2013 - Expected Returns (Left)2016 - Expected Return (Left) CalPERS Discount Rate

Chart Source: Wilshire Associates, Pension Consulting Alliance 4

Agenda Item 7a, Attachment 3 Page 4 of 22

Expected Return and Risk Estimates

7.10%

6.21%

12.94% 12.58%

0%

2%

4%

6%

8%

10%

12%

14%

2013 2016

Expected Return - 10-Year

Expected Risk

Chart Source: Wilshire Associates

5

Agenda Item 7a, Attachment 3 Page 5 of 22

Funding Risk – Current Strategic Asset Allocation

1%

2%

3%

4%

5%

6%

7%

8%

2% 4% 6% 8% 10% 12% 14% 16%

Expe

cted

Com

poun

d Re

turn

Expected Volatility

Efficient Frontier 2013 ALM Workshop Capital Market Assumptions 2016 Wilshire Associates Asset Class Assumptions

6

Agenda Item 7a, Attachment 3 Page 6 of 22

Challenges ahead…

• Global growth is slowing • U.S. growth, the driver of global growth, will struggle to

make 1.5% this year • Many business cycle indicators in mid-to late cycle- maybe

two to four years of slow growth • Historically low interest rate environment

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Aging Population

8

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Cash Flow Negative

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

Total Contributions Investments UsedFiscal Year

$ Billi

ons

10

Agenda Item 7a, Attachment 3 Page 10 of 22

Balancing the Equation

11

Investment Income

Contribution Rates

Benefits

Agenda Item 7a, Attachment 3 Page 11 of 22

The view ahead…

• Caution: low returns ahead • We’re focused on risk • Our partnership: a shared responsibility

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Stakeholder Outreach - Employers • Engaged employers and compiled input via surveys and in-

person contact

• Questions designed to elicit level of awareness, preparation, risk tolerance and preferences related to potential discount rate reduction

• 616 employers provided responses

• Meetings and engagements with member association leaders

13

Agenda Item 7a, Attachment 3 Page 13 of 22

Awareness

• Overall 76% of employers are following the market impact on CalPERS’ investment performance - School employers: 52%

• Some level of planning for higher rates through forecasting or pre-funding

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Agenda Item 7a, Attachment 3 Page 14 of 22

Employers’ Priorities • 68% of employers said most

important is reducing volatility of contribution rates

- 21% - Risk Mitigation - 11% - Maximize Returns

Risk Mitigation

Reduce Volatility

Maximize Returns

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Agenda Item 7a, Attachment 3 Page 15 of 22

Financial Readiness

• How are employers financially preparing in anticipation of an increase in future contribution rates?

- 61% Budget forecasting out three & five years - 18% Considering a pre-funding trust - 9% Pre-funding a trust already - 13% Considering making additional payments to CalPERS - 12% Making additional Payments to CalPERS already - 6% Other

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Agenda Item 7a, Attachment 3 Page 16 of 22

Are employers prefunding pension liabilities?

17

Yes

No

29%

71%

Agenda Item 7a, Attachment 3 Page 17 of 22

Impact of Discount Rate Decrease in Next 12 Months

18

High 45%

Extremely High 27%

Some 28%

Agenda Item 7a, Attachment 3 Page 18 of 22

Phased-In Reduction vs One-Time Reduction Discount Rate • 86% of employers favor phasing in reduction

Phased-In Reduction

One-Time Reduction

14%

86%

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Member Association Feedback

• Increased costs to employer and employees • The inability of the recently approved Risk Mitigation policy

to take effect • CalPERS focus on a short-term market environment over

the next 10 years • Incremental approaches and revisiting of policies and

assumptions instead of a long-term focused plan.

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Agenda Item 7a, Attachment 3 Page 20 of 22

Other US Pension Plans Discount Rates

21

Data from CalPERS 2016 Annual Funding Level and Risks Report

Since FY 2012… 59 Discount

Rate

7.5% Median

Discount Rate

50 BPS Median

Discount Rate Reduction

Agenda Item 7a, Attachment 3 Page 21 of 22

Proposed Next Steps

• December 2016 - Board workshop - Impacts

• Costs • Funded status • Timing

- Staff Recommendations

• Continue stakeholder outreach

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Agenda Item 7a, Attachment 3 Page 22 of 22