The San Diego City Employees’ Retirement System (SDCERS) Board of Administration voted to reduce the System’s discount rate from 7.0% to 6.75%, effective with the June 30, 2017 actuarial valuation, and from 6.75% to 6.5%, effective with the June 30, 2018 actuarial valuation, following a detailed presentation by the System’s actuary Cheiron. The Board of Administration approved the new discount rate at its meeting on September 8, 2017 by a vote of 10-2.
The vote specifically lowered the discount rate 50 basis points, or 0.50% over two years, with a 25 basis point percent reduction each year. This is the sixth 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 to 7.5%, and again to 7.25% in 2013, to 7.125% in 2015, and to 7.0% in 2016.
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.
In light of declining interest rates and future capital market earnings projections, lowering the discount rate has become common among municipal pension systems across the country and within California. A survey of public retirement funds in February 2017 shows that virtually all plans have reduced their investment return assumption since 2009. The national median assumption is currently about 7.50%, but is lower among California systems.
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 over 20,000 members.