Public Pension Return Assumptions Fall to All-Time Low

Lowered projections could increase financial burden on state, local governments.

Despite already feeling the financial strain from their obligations to public pensions, state and local governments can expect to face increased commitments to their retirement systems as investment return assumptions have fallen to an all-time low this year.

According to the National Association of State Retirement Administrators (NASRA), nearly 75% of the 128 public plans it has tracked have reduced their investment return assumptions since fiscal year 2010, which has resulted in an all-time low median investment return assumption of 7.45% as of November, from 8% eight years earlier.

Since 1987, public pension funds have accrued approximately $7 trillion in revenue, said NASRA, of which $4.3 trillion, or 61%, is from investment earnings, with 27%, or $1.9 trillion, coming from employer contributions, and the remaining 12%, or $844 billion, coming from employee contributions. Because public pensions rely on investment returns for a majority of their revenue, the lower the investment returns are, the more governments will have to spend to cover the shortfall.

Of the 128 public pension plans tracked by NASRA, only six still have investment return assumptions at the 2010 median of 8.0%, which is the highest assumed rate of return among the plans, and only 22 have assumed rates of returns of 7.5% or higher. A majority of the plans (69) have assumed rates of return that range between 7.0% and 7.5%, and 37 plans have assumed rates that are 7.0% or lower. Kentucky’s Non-Hazardous Employee Retirement System pension registered the lowest assumed rate of return at 5.25%, and was the only plan among the 128 with an investment return assumption below 6.25%.

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Among the more high-profile pension funds lowering their investment return assumptions this year were the North Carolina Retirement Systems, which cut its assumed rate of return to 7% from 7.2%, the Teacher Retirement System (TRS) of Texas, which reduced its assumed rate of investment return to 7.25% from 8%, and Minnesota’s state pension, which cut its assumed rate of return to 7.5% from 8%. New Jersey also said it would lower its investment return assumption to 7% in fiscal 2023, after temporarily raising it to 7.5% from 7.0% in fiscal 2019

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