Los Angeles Pension System Cuts Rate of Return Assumption

LACERS lowers investment guidance to 7.25% from 7.5%.

The Los Angeles City Employees’ Retirement System (LACERS) board has unanimously voted to cut its assumed rate of return to 7.25% from 7.5%, the system announced at its most recent board meeting.

In addition to cutting the assumed rate of return, the LACERS board also adopted an inflation assumption of 3.00%, an inflation component of the salary increase assumption of 3.00%, and a payroll increase assumption of 3.50%. It also adopted a credit rate for employee contribution of 3.00%, and a real across-the-board pay increase component of the salary increase assumption of 0.50%.

The new investment rate assumption is expected to add $38 million in retirement costs to the city of Los Angeles’ general fund budget, and comes amid public concerns over the city’s growing pension burden, according to the Los Angeles Times.

LACERS’s consultant, Segal Consulting, recommended that the investment rate assumption be lowered to 7.00%, and suggested the 7.25% rate as an alternative assumption. The LACERS staff supported the 7.25% alternative, but under the stipulation that another review of the economic assumptions is completed in 2018, after the board adopts a new asset allocation.

The investment return assumption is comprised of two primary components: inflation and real rate of investment return, with adjustments for investment expenses and risk.

The LACERS board had been debating how much to lower the investment returns over the past couple of months. While Segal’s preferred rate was the lower 7%, that reportedly would have added $51 million to $84 million to the city budget next year, depending on the inflation assumption chosen by the board.

Board member Michael Wilkinson, a representative for retired city workers, advocated the lower 7% recommendations, saying it would be “dangerous” for the agency to rely on a higher, less-realistic number, according to the Times.

The LACERS move follows a reduction in the assumed rate of return for the Los Angeles Fire and Police Pensions (LAFPP). In June, the Fire and Police Pension Commissioners approved the plan’s actuary recommendation to lower the investment return assumption to 7.25% from 7.50%. Segal, which is also the LAFPP’s actuary, said the investment return assumption reduction was needed, primarily due to a continued decline in inflation over the past two decades. The assumption was previously lowered to 7.50% from 7.75% in 2014.

The lower investment return assumptions for both LACERS and the LAFPP will add $170 million in retirement costs to Los Angeles’  budget next year, city analysts say, according to the Times.

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