CalPERS Releases Estimates on New Actuarial Policies’ Impact on Employer Contribution Rates - Projected Rate Increases are Tied to Employers’ Asset Volatility Ratios

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This past Friday, the California Public Employees’ Retirement System (CalPERS) released Circular Letter 200-019-13 which estimates the increase to employer contribution rates for fiscal years 2015/2016 – 2019/2020 based on new actuarial policies approved earlier this month. The rate of employer contributions may rise dramatically, but the Circular Letter suggests that the increase employers will experience may not be as significant as originally estimated. The overall impact of the increase will depend on the employer’s current contribution rates and asset volatility ratio (AVR).

The estimated increases are determined on the basis of each employer’s AVR – which is calculated by dividing an employer’s assets by their annual payroll, or for pooled plans, by dividing the pool’s assets by the pool’s annual payroll. To estimate your agency’s employer contribution rates for fiscal years 2015/2016 – 2019/2020, locate your AVR in the actuarial report provided by CalPERS. Then, using the AVR column in the Circular Letter that is closest to your agency’s AVR, add the percentages in the column to your agency’s current employer contribution to get the projected rate for each year.

The Circular Letter provides an example of how the estimated increases will affect an employer’s contribution rate. Predictably, it is estimated that employers with a lower AVR will experience a lower increase in rates than those with a higher AVR. For example, CalPERS estimates that an employer with an AVR of 4 will experience a total increase over a five-year period of 5.5% while an employer with an AVR of 8 will experience a total increase over a five-year period of 11%. 

It is important for employers to keep in mind that these figures are merely estimates, and that they are subject to change. For example, the estimates were determined based on the assumption that CalPERS will have a 7.50% final return on investments after the 2011/2012 fiscal year, but CalPERS does not yet have this information. 

If you would like more information about how the new actuarial policies will impact your agency’s contributions, or to explore potential strategies to mitigate the financial impact, please contact John Wahlin, Isabel Safie or Allison De Tal in the firm’s Employee Benefits practice group, or your BB&K attorney.