Introduction

 

CalPERS (California Public Employees’ Retirement System) is the largest public pension fund in the United States, managing retirement and health benefits for over 2 million California public employees, retirees, and their families. As an agency administering one of the largest US public pension funds, CalPERS plays a pivotal role in the lives of millions of Californians as well as the state’s overall financial health. This guide provides an in-depth look at CalPERS – its history, operations, benefits, challenges, and future outlook.

Understanding CalPERS

What is CalPERS?

CalPERS is the largest public defined benefit pension fund in the US with over $450 billion in assets under management as of 2022. It administers retirement, disability, and death benefits for state and public agency employees, retirees, and their beneficiaries. CalPERS also manages health benefits for over 1.5 million members.

The core purpose of CalPERS is to provide retirement and health security for those who have dedicated their careers to public service. It serves more than 2 million members across over 3,000 public employers in California. This includes employees of the state, public schools, counties, cities, and other local agencies.

History and Evolution

CalPERS was established in 1932 by an act of the California Legislature. It began operations in July 1933 as the California State Employees’ Retirement System, managing pension benefits for state employees.

Key milestones in CalPERS’ evolution include:

• 1939: Public agencies were allowed to contract with CalPERS.
• 1961: The system was opened up to California’s public school employees.
• 1982: The name was changed to “CalPERS” as we know it today.
• 1986: CalPERS began offering health benefits upon retirement.
• 1995: CalPERS became the first public pension fund to surpass $100 billion in assets.

Over the decades, CalPERS adapted to economic conditions, market fluctuations, demographic changes, and legislative reforms that impacted benefits and funding structures. Prudent leadership and strategic investment approaches have bolstered CalPERS’ growth into one of the world’s largest institutional investors.

CalPERS Membership

Membership in CalPERS is open to all eligible state and public agency employees in California. This includes:

• State workers
• Public school teachers and administrators
• Employees of participating cities, counties, and public entities
• State university and judges

New state and school employees are automatically enrolled in CalPERS. Public agencies can contract with CalPERS to cover their employees and board members.

As an active member, employees contribute a percentage of their salary towards retirement savings. The employer contributes an equal amount. Upon retirement, members receive a predictable monthly benefit for life based on salary, years of service, and age at retirement.

Managing Investments and Funds

Investment Strategy

With over $450 billion in assets, CalPERS carries great fiduciary responsibility to invest the funds wisely. The system follows a disciplined long-term investment approach focused on performance, risk management, and responsible investing practices.

The overall investment strategy aims to achieve sustainable returns while balancing risk and generating sufficient income to pay benefits. A well-diversified portfolio spreads out risk across different asset classes – stocks, bonds, real estate, private equity, and more.

CalPERS’ investment beliefs revolve around taking acceptable risks and investing for the long term. The fund cannot focus on short-term gains at the cost of long-term results. Asset allocation adheres to the “risk factor” approach which examines multiple dimensions of risk.

Investment Portfolio

CalPERS holds a broadly diversified investment portfolio spanning different asset classes, sectors, and geographic regions. Here is the asset allocation as of June 2022:

• Public Equity – 46%
• US Equity – 22%
• Non-US Equity – 18%
• Global Equity – 6%
• Fixed Income – 15%
• Real Assets – 13%
• Real Estate – 8%
• Infrastructure & Forestland – 3%
• Inflation Assets – 2%
• Private Equity – 13%
• Liquidity – 2%
• Cash/Temporary Investments – 1%

The Investment Committee oversees asset allocation and risk management. Portfolio construction focuses on long-term value creation while providing adequate liquidity and cash flows.

Benefits and Impact

Retirement Benefits

CalPERS provides retirement security for members who dedicate their careers to public service. Retirement benefits are calculated using a formula based on age at retirement, years of service credit, and final compensation.

• Age Factor: A percentage based on age at retirement. The percentage is lower for early retirement and higher for retiring after reaching full retirement age.
• Years of Service: Generally, members earn one year of service credit for each year of full-time work. Part-time service is prorated.
• Final Compensation: Highest average annual compensation over a 12 or 36-month period, depending on the retirement formula.

The age factor is multiplied by years of service and final compensation to determine the percentage of salary to be received as the retirement benefit. Cost of living adjustments provide protection against inflation.

Health Benefits

CalPERS administers health benefits for active and retired state and public agency employees. Members can choose from a variety of health plans during open enrollment. After retiring, most members can continue their current health plan or choose a new one.

Retiree health benefits provide crucial protection against high medical costs. CalPERS works to ensure quality coverage at an affordable cost for members. The percentage of premiums paid by the employer and retiree varies.

Socioeconomic Impact

As a major public pension system, CalPERS impacts state and local economies. Annual benefit payments to retirees in California total over $24 billion, providing an economic stimulus to communities.

CalPERS also plays a key role in attracting and retaining skilled employees in public sector jobs through retirement and healthcare benefits. This contributes to building a talented workforce serving California residents.

By providing retirement security to members, CalPERS enables a stable post-career life for public employees. This contributes to California’s overall financial health and prosperity.

Challenges and Future Outlook

Funding Challenges

CalPERS, like other pension systems nationwide, faces funding gaps driven by demographic changes, retiree longevity, market volatility, and low interest rates. The system currently has about 70% of assets needed to cover all future obligations.

To improve funding levels, CalPERS has taken measures such as:

• Adjusting asset allocation to balance returns and risk
• Increasing fixed income investments as the system matures
• Phasing in higher employer contribution rates
• Advocating for smarter pension funding policies
  Nonetheless, a balanced approach is needed to ensure adequate funds without overburdening employers and taxpayers. Sustainable benefits must align with fiscal realities.

Technological Advancements

CalPERS is focused on leveraging technology to streamline operations and strengthen customer service. Recent initiatives include:

• Upgrading member websites and self-service tools
• Implementing advanced cybersecurity protections
• Incorporating data analytics in investment strategy
• Developing smartphone apps for on-the-go account access
• Digitizing records and automating workflow processes

While technology can bolster efficiency, CalPERS must also carefully manage risks ranging from data breaches to over-reliance on automated decisions. Change must be balanced with appropriate human oversight.

Trending FAQs

What is the eligibility criterion for CalPERS membership?

Membership is open to all state, public school, and contracting public agency employees in California who are eligible for membership under their employer’s contract. Full-time employees generally become members on their first day of employment. Exclusions apply for certain short-term or highly compensated positions.

How are CalPERS retirement benefits calculated?

The basic benefit formula is: Age Factor x Years of Service Credit x Final Compensation. The age factor is based on the age at retirement. Years of service credit is generally one year for each year of full-time work. Final compensation is the highest average annual pay over a 12 or 36-month period.

What steps is CalPERS taking to address funding challenges?

CalPERS is adjusting contributions, targeting higher investment returns within prudent risk levels, advocating for better funding policies, and taking a balanced approach to ensure long-term sustainability. The aim is reasonable funding without overburdening stakeholders.

Can CalPERS members manage their investment preferences?

CalPERS manages investments at the system level based on fiduciary responsibility. Members cannot directly control investment selections. Some supplemental defined contribution plans like Savings Plus allow more investment flexibility.

Conclusion

For over 85 years, CalPERS has served a vital role in the lives of millions of public employees and retirees who dedicated their careers to serving California. As a steward of retirement and health benefits, CalPERS strives to deliver sustainable, quality programs for all members. While facing funding gaps, demographic changes, and other challenges, CalPERS continues adapting its investment strategies and benefit designs focused on the long-term welfare of members and beneficiaries. With strong and ethical leadership, CalPERS will continue working to provide retirement security for state and public agency workers in California.