Record Returns Spur NY to Cut Assumed Return Rate to Below 6%

New York State Comptroller Thomas DiNapoli has lowered the long-term assumed rate of return on the $268.3 billion New York State Common Retirement Fund to 5.9% from 6.8%. He also said employer contribution rates to the New York State and Local Retirement System (NYSLRS) will be reduced.

The New York State Common Retirement Fund is the third largest public pension fund in the United States, and it holds and invests the assets of the NYSLRS on behalf of more than 1 million state and local government employees and retirees and their beneficiaries. The NYSLRS itself is broken into two systems: the Employees’ Retirement System (ERS) and the Police and Fire Retirement System (PFRS).

The estimated average employer contribution rate for the ERS will be lowered to 11.6% of payroll from 16.2%, while the estimated average employer contribution rate for PFRS will be cut to 27% of payroll from 28.3%. According to the actuary’s estimates for the fund, the expected total employer contributions for Feb. 1, 2023, are $4.4 billion, which is $1.5 billion less than the expected employer contributions during the same period for 2022 and the lowest level since 2011.

Employer rates for NYSLRS are determined based on investment performance and actuarial assumptions recommended by the retirement system’s actuary and approved by DiNapoli.

“The fund’s strength gives us the ability to weather volatile markets. Our prudent strategy for long-term, steady returns helps ensure our state’s pension fund will continue to be one of the nation’s strongest and best funded,” DiNapoli said in a statement. “While the reduction in employer contribution rates is welcome news for taxpayers, our investment decisions are always made based on what is best for our 1.1 million working and retired members and their beneficiaries.”

It is the fourth time DiNapoli has lowered the state pension fund’s assumed rate of return, having reduced it to 7.5% from 8% in 2010, then to 7% in 2015, and then to 6.8% in 2019. The new reduction puts the fund well below the median assumed rate of return among state public pension funds of 7%, according to the National Association of State Retirement Administrators (NASRA). Only 34 of the 133 state public pension plans listed had assumed rates of return of less than 7%.

DiNapoli also announced that the funded ratio of the state pension fund is 99.3% and that it has annualized rates of return over the past five, 10, 20, and 30 years of 11.17%, 9.19,%, 7.65%, and 8.96% respectively.

That the assumed rate return is more than 3 percentage points below the fund’s 10-year annualized return is indicative of the retirement system actuary’s forecast of a lower-return environment over the next decade. In this year’s annual report to the comptroller on actuarial assumptions, Actuary Michael Dutcher provided a forecast of a 6.07% return net of fees over the next 10 years. He also said 2021’s record rate of return “provides a door of opportunity to align the assumed return with the sole trustee’s risk appetite.”

Dutcher also recommended increasing the inflation assumption to 2.7%, which would result in an increase in the cost of living adjustments (COLAs) to 1.4% from the current 1.3%. The COLA is half of the percentage increase in inflation raised to the next tenth, which means a COLA of 1.4% will be applied in September, which is 0.1% more than the current assumption. COLAs apply to the first $18,000 of a retiree’s single-life pension. Spousal beneficiaries are entitled to one-half of the retiree’s COLA.

“This is not primarily a response to the FY 2021 experience,” Dutcher said, “but there is a growing rumbling among economists that is less sanguine about inflation expectations than in the previous two decades.”