Oregon Treasurer: State Pension Should Lower Expected Rate of Return

Oregon’s treasurer is advocating for a drop in the expected rate of return that the state’s $60 billion pension plan uses to calculate funding levels.

(July 26, 2012) — Add another voice to the chorus of critics assailing public pension plans in the United States for relying on what they say are overly optimistic assumed future investment returns.

In a letter written to the board of the $58 billion Oregon Public Employees Retirement Systems (OPERS), Oregon Treasurer Ted Wheeler called for a reexamination of the fund’s 8% expected rate of return and advocated the assumption of a more “realistic” number. Such a move, reflecting the difficulty the fund has had in earning robust returns of late, could cause a sizeable spike in the plan’s underfunding. 

“The PERS Board should immediately revisit the assumed investment return rate, which is currently set at 8%,” Wheeler wrote in the letter, which he sent to the board last month. “The PERS Board should evaluate lowering this rate, because it is imperative we have a realistic rate of return that will ensure the long-term sustainability of our pension fund.”

Wheeler acknowledged that underfunding would jump as a result of the shift, and suggested implementing accounting changes that would offset the added costs, such as lengthening the amortization timeframe by which gains and losses are recorded to reflect the increase in the average period of employment. He also called for more general reform to restrain pension costs, recommending a cap to cost of living adjustments and ending the practice of reimbursing out-of-state beneficiaries for Oregon income taxes that they do not actually pay.

“Oregon is fortunate to have had both a well-managed pension plan and leadership over the past 20 years that has already many of the reforms that states across the country are just now doing to control their pension costs,” he concluded. “Oregon deserves a pension system that provides a decent benefit and does not require taxpayers to choose between funding basic services or retirement costs.”

Public pensionplans across the US have wrestled with how to implement reform, particularly around the issue of whether the expected rates of return that they employ to calculate liabilities are too high. Until recently, all public plans were allowed to use whatever return they saw fit, and many have utilized a figure of around 8% that, while reasonable by historical standards, has been difficult to achieve in recent years. In late June, the Governmental Accounting Standards Board approved new regulations that would restrict that ability for “insufficiently” funded plans. If the OPERS board lowers its rate, it will join funds such as the California Public Employees’ Retirement System, the nation’s largest, which in March dropped its investment return target from 7.75% to 7.5%.