1. CalPERS Background 1,439 School Districts 1 State of California 1,581
Public Agencies
3,021 Total Employers in Retirement Program
650,000
Receiving Monthly Pension Benefit
1.85 Million Members
Source: June 30, 2016 Comprehensive Annual Financial Report
* Retirees and beneficiaries and survivors

2. Our Members

4. Pensions are a Shared Responsibility
Employer
Employees
CalPERS
Pension

5. Shared Responsibility

6. annualized return Since 1988
Today:
$335 billion in assets
11.20%
8.83%
4.39%
6.60%
8.40%
2016/17 Portfolio Return
5-yr Annualized Return
10-yr Annualized Return
20-yr annualized return
annualized return Since 1988

7. CalPERS Historical Allocation Discount Rate,10yr Rolling Return, and 10yr US Treasury Yield

9. Factors Driving Funding Risk
Plan Demographics
Market Conditions
Asset and liability ratios
Plans are maturing
Public employees are living longer
Increased cash outflows
Current portfolio and market environment includes significant risk of volatility
Market valuations and return expectations
SCOTT
Let’s start with some of the factors that are driving Funding Risks. And as you know these risk factors are not specific to just CalPERS.
These risks apply to most pension plans and may also be a risk factor in your plan.
Maturity levels are at their highest levels and they are expected to continue to increase. More than 10,000 baby boomers will turn 65 each day, and this pattern will continue through 2030… which totals almost 4 million people a year.
Not only are the baby boomers starting to retire in large numbers, retirees are also expected to live longer in retirement, and also receive benefits for a longer period of time.
ERIC
Another risk factor is what we have seen in the financial markets over the past 10 years.
It’s safe to say they have brought volatility and uncertainty to the economy.
The need to look at the funding of pension funds is needed more than ever before, as economists and financial experts believe that over the next five to 10 years the economy will head into a cycle of lower returns.
Even recently, while the Dow being up is certainly a good thing, it is not necessarily an indicator of the types of investments that we have at CalPERS.
We are invested in stocks, which are represented by the Dow, but we also have investments in bonds, real estate, private equity, and a number of other markets.
Having a diverse portfolio like we do keeps the fund safe in times where the stock market isn’t doing as well as it is currently.

10. Why A Discount Rate Change in December 2016?
Market conditions have changed
Seeing more uncertainty in the forecast
Next 10 years are consequential
To close the cash flow funding gap
Risks in system continue to grow

11. Change in Market Conditions
7.5%
7.1%
Assumed rate of return

12. Contribution & Benefit Payments

14. Approved Discount Rate Phase-In for Public Agencies
Required contributions from FY to FY
FY ─ 7.375%
FY ─ 7.25%
FY ─ 7.0%

15. Timing of Change to Annual Valuations
Valuation Date
Contribution Rate Change
State
6/30/16
17/18
Schools & Public Agencies
18/19
Affiliate Plans

16. Contribution Increases From Discount Rate Change
Normal Cost
UAL Payments
Valuation Date
FY Impact
Misc. Plans
Safety Plans
6/30/2016
0.25% %
0.5% %
2% - 3%
6/30/2017
0.5% - 1.5%
1.0% - 2.5%
4% - 6%
6/30/2018
1.0% - 3.0%
2.0% - 5.0%
10% - 15%
6/30/2019
15% - 20%
6/30/2020
20% - 25%
6/30/2021
25% - 30%
6/30/2022
30% - 40%

17. Asset Liability Management (ALM) Framework
Plan Demographics
Benefit Structure
Market Conditions
Actuarial Reports
Actuarial Policies: Smoothing/ Amortization
Asset Liability Management (ALM)
Pension Beliefs
Funding & Risk Mitigation Policy
Treasury Management
Actuarial Assumptions
Investment Allocation
External Factors Driving Risk
External Factors Reducing Risk
PEPRA
As illustrated in this image, our pension beliefs are at the foundation of our ALM process. They are our guiding principles and standards in our journey to identify and develop risk mitigation strategies.
The pension beliefs reflect CalPERS view on the importance of retirement security, defined benefit plans, fiduciary duty, and the need to ensure long-term pension sustainability.
The boxes above pension beliefs represent the many ways we examine our assets and liabilities, as well as our economic and actuarial assumption.
And to the left and right you’ll notice the external and internal factors that are driving pension risk.
Later I’ll talk more about the factors driving risk as this is where we really need to focus our attention and ensure that together we are doing what we can to mitigate those risks.

18. Stay Informed Through the ALM Process
Nov. 2017
Experience Study & Educational Workshop: Candidate Portfolios
Dec. 2017
First opportunity for Board to Adopt ALM Changes
Feb. 2018
Second Opportunity for Board to Adopt ALM Changes
Jan. 2017
Educational Workshop: Public Access
Apr. 2017
Educational Workshop: Private Assets
Jul. 2018
Implementation of Board Decisions
Jun. 2017
Approval of Capital Market & Economic Assumptions
Jul. 2017
Fiscal Year Investment Returns Announced & Educational Workshop: Leverage
Oct. 2017
CalPERS Educational Forum

19. Considerations Pension prefunding options for employers
CalPERS’ focus: reducing cost & complexity
Vested rights cases for county pension systems
PEPRA employees will reduce unfunded liability curve
Already nearly 30% of all members
Stakeholder engagement with Board and executive team

20. QUESTIONS Thank you for your time today.
We hope this information is helpful to your decision making.
Now we can open it up for questions….

21. Definitions
Asset Liability Management (ALM) — An integrated look at our assets and liabilities to determine the right mix of investments for our portfolio, specifically designed to achieve a sound and sustainable fund. Done on a rolling 4-year cycle.
Discount Rate — Also known as the “assumed rate of return”. It is what we assume our $304 billion in investments will return in a typical fiscal year, July 1 to June 30.
Normal Cost — The annual cost of service accrual for the upcoming fiscal year for active employees. The normal cost should be viewed as the long term contribution rate.
Risk Mitigation Policy — A mechanism that triggers adjustments to strategic asset allocations and reduces discount rate by a set amount when returns exceed a certain threshold. 
Unfunded Liability / Unfunded Actuarial Accrued Liability (UAL) — When a plan or pool’s Market Value of Assets is less than its Accrued Liability, the difference is the plan or pool’s Unfunded Liability. If the Unfunded Liability is positive, the plan or pool will have to pay contributions exceeding the Normal Cost.