Illinois Pension Signals Lower Return Target

The executive director of the $37 billion Teachers’ Retirement System of the State of Illinois has hinted that the plan may lower its assumed rate of return.

(June 28, 2012) — The $37 billion Teachers’ Retirement System of the State of Illinois (TRSI) may employ a lower expected rate of return when it calculates its liabilities, the chief of the plan suggested in an interview with the Wall Street Journal.

“My guess is that [the rate of return] comes down,” Richard Ingram, executive director of TRSI, told the WSJ. “We are not immune from financial reality. We are looking at the same numbers as everyone else.”

TRSI uses a discount rate of 8.5%, permitted under current Governmental Accounting Standards Board (GASB) rules but one of the highest relied on by US public pensions. Lowering that figure even slightly would cause a large spike in liabilities for a plan that is already deeply underfunded. As of June 30, 2011, the plan was 46% funded.

While over the past 30 years TRSI earned an annualized rate of return of 9.3%, over the past decade it has on average fallen short of that benchmark. “The question is whether that is a good number for the next 30 years,” said Ingram. “That is what we are wrestling with right now.”

As a national debate surges over whether public pensions are accurately computing their future liabilities, early this week the GASB voted to approve new accounting standards that could cause a jump in public pension underfunding. Although funds that the GASB deems sufficiently funded can continue to base their liability assumptions on an estimated rate of return of their choosing, insufficiently funded plans would have to use a discount rate of between 3% and 4%. The new standards, should the GASB not decide in the meantime to relax them, would come into effect over a period of two years.

Meanwhile, this month a study by the Pew Center on the States found that the pension and benefit obligations of state pension plans faced a staggering $1.38 trillion unfunded liability. The Pew survey relies on data from the 2010 fiscal year—the latest available but still outdated—so the true figure may be higher or lower than that.

Although public pension funds struggle with underfunding issues and do the best with what they resources they have, there are pockets of excellence throughout. The latest issue of aiCIO magazine profiled the two men in charge of the San Bernardino County Employees’ Retirement Association, who are managing the task of paying $8 billion in benefits with only $6 billion in assets. To read “Bright Lights, Big Country,” click here.

To read Ingram’s interview with the WSJ, click here.

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