​SDCERS Board of Administration Adjusts Discount Rate to 7.125%

Date: Nov 23, 2015

 

The San Diego City Employees’ Retirement System (SDCERS) Board of Administration voted to reduce the System’s discount rate to 7.125%, following a detailed presentation by the System’s actuary Cheiron. The Board of Administration approved the new discount rate at its meeting on November 13, 2015 by a vote of 7-4. The change is effective with the June 30, 2015 actuarial valuation, which determines employee and employee contributions for the fiscal year beginning July 1, 2016.
 
The vote specifically lowered the discount rate 25 basis points, or 0.25% over two years, with a one-eighth percent reduction each year. This is the fourth time the rate has been changed since 2008, when it was changed from 8.0% to 7.75%, the first change in decades. In 2011, the discount rate was further reduced from 7.75% to 7.5% and from 7.5% to 7.25% in 2013.
 
The discount rate, or the rate at which a system discounts future liabilities of member benefits to determine their actuarial present value, is set by the SDCERS Board of Administration with input from the system actuary. Rate adjustments are prompted by several key factors, including historical plan experience, expectations for the future, the Board of Administration’s risk preference as well as industry trends.
 
The Board also lowered the wage inflation rate assumptions by the same amount, phased over two years. SDCERS current wage inflation rate is 3.3%.
 
Following market trends over the past decade, lowering the discount rate has become more common among municipal pension systems across the country and within California. A survey of public retirement funds in January 2015 shows that many plans have reduced their investment return assumption since 2009. The median assumption is currently 7.75%. The number of plans assuming 7.5% or lower has increased significantly.
 
The lower discount rate will increase the plan sponsor Actuarially Determined Contribution (ADC) payment, Unfunded Actuarial Liability (UAL) and member contribution rates for City and Airport employees hired since 2013 under PEPRA rates. The precise impact of the discount rate will be unknown until the release of the June 30, 2015 valuation in January 2016. Preliminary estimates by SDCERS’ actuary indicate the impact to be approximately a $6 million increase to the City of San Diego’s ADC in FY 2017, an increase of $0.4 million to the San Diego Unified Port District’s FY 2017 ADC and an increase of $0.2 million to the San Diego County Regional Airport Authority’s FY 2017 ADC.
 
SDCERS administers defined benefit plans for the City of San Diego, the San Diego Unified Port District, and the San Diego County Regional Airport Authority and provides service retirement, disability retirement, death and survivor benefits to approximately 20,800 members. 




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