Frequently Asked Questions About Asset Liability Management (ALM)

ALM is Asset Liability Management, also known as the ALM process. CalPERS' ALM Policy (PDF) was put into place by our board to strengthen the long-term pension fund sustainability. It runs on a four-year cycle with a mid-cycle review after two years. The full review will take place throughout this year.

The goal is to select an investment policy portfolio designed to meet our long-term investment objectives, balancing the need to minimize the expected cost of future pension payments against the risks needed to support expected returns.

As part of the ALM process, the Investment Office presents to the CalPERS Investment Committee several portfolios that detail the level of risk, volatility, and expected returns based on potential investment allocations to each asset class. The Actuarial Office presents the experience study, which projects our future pension liabilities.

During the process, our board reviews its overall risks, taking into consideration the long-term sustainability of the System. The board will decide:

• Risk Appetite: Some investments, public equities, or stocks, for example, are more risky than other investments, such as bonds. Generally speaking, investors taking more risk expect to be rewarded with higher returns.
• Asset Allocation: The percentage of the portfolio that is allocated to each asset class. Our asset classes include public equity, fixed income, real assets, and private equity.
• Discount Rate: The interest rate used in calculating the cost for employers, as well as contributions for employees. It also represents the long-term assumed rate of return on investments based on the asset allocation mix decided by the board.

The ALM process will begin in February 2021 and be completed at the November 2021 board meeting. The new strategic asset allocation and discount rate, if changed, will go into effect on July 1, 2022. For a more detailed timeline, see the CalPERS Asset Liability Management Cycle (PDF) fact sheet.

• Capital Market Assumptions (CMA)
• Contributions
• Experience Study
• Discount Rate
• Risk Appetite

Capital Market Assumptions provide estimates of returns and risk by asset class. This helps the board estimate total investment returns over 10-year, 20-year and 30-year periods.

This year’s analysis will incorporate a range of CMA projections provided by both external managers and our Investment Office. Though a single CMA projection will be used to set the discount rate, considering a range helps us better understand the range of outcomes that can occur if the future is different than the chosen CMAs.

Our Actuarial Office is responsible for providing the board with the Experience Study. This study looks at past data and calculates member deaths, retirements, and other factors over a specific period. It then takes this information and runs models to project future pension obligations.

For every dollar in pension benefits paid, 55 cents come from investment earnings. The better our investments perform; the less employers and employees likely must contribute. Deciding what percentage of the portfolio to devote to each asset class is one of the most important factors in successful investing.

The board must also consider risk factors, such as volatility, when deciding how much of the portfolio should be allocated to each asset class.

The ALM process includes setting the discount rate, or the assumed rate of return for investments. The discount rate is used in calculating how much members and employers contribute to their pension.

A lower discount rate could mean higher contributions. It also means less variability year to year. The opposite is true for higher discount rates.

No. Pension benefits are determined by the benefit formula. That's not impacted by the ALM process.

Yes. The ALM process is conducted in public during board meetings, and members of the public are invited to comment at that time. A schedule of CalPERS' board meetings for 2021 is posted to our website.

We're a long-term investor. While our Investment Office continually monitors the financial markets and the economic climate, the asset allocation isn't changed outside of the ALM process. The investment team may prudently change certain investments over the course of a year depending on the markets. However, unless directed by the board, they do not take money from one asset class and move it to another. This sort of dramatic shift would undermine return earnings.