(July 19, 2012) — The $36.3 billion Maryland State Retirement and Pension System’s board of trustees have voted to keep the assumed rate of return on investments at 7.75%.
The 14-member board, which includes Treasurer Nancy Kopp, voted to maintain the assumed rate of return at the level where it has been nearly 10 years. Meanwhile, it voted 11-1 to change demographic assumptions affecting the scheme, the Associated Press initially reported.
The assumptions include mortality rates, rates of service retirement, rates of disabled retirements and payroll growth.
Maryland’s decision to maintain its return rate at its longstanding 7.75% follows the California Public Employees’ Retirement System (CalPERS) Board of Administration’s decision to lower its assumed rate of return to 7.5% earlier this year.
CalPERS’ assumed rate of investment return — also called the discount rate and calculated using expected price inflation and real rate of return — was last changed more than a decade ago when it was reduced to 7.75% from 8.25%. Since then, critics have continued to claim that the scheme’s return target was overly optimistic to keep up over the long-term. “This was a difficult, but important, decision for the board to make,” Rob Feckner, CalPERS’ board president, said at the time. “We understand the impact this will have on our employers in meeting contribution requirements. However, current economic conditions impelled us to make this change now, and our actuaries will continue to evaluate the discount rate in the coming years.”
In regards to Maryland’s decision to maintain its 7.75% return rate, two reports prepared last year for the Florida pension system – commonly thought to be relatively well funded – detailed the effects of a 7.75% assumed rate. Milliman and Hewitt EnnisKnupp, reporting to the Governor and State Board of Administration (SBA), respectively, both raised the issue of discount rates’ effects on pension liabilities. The report explained that while Florida’s pension system used a 7.75% figure, lowering this figure would increase the pension obligation of the State’s fund. Read the full report here.