Rhode Island Approves Assumption Changes

Treasury says lowering investment, inflation assumptions will avoid $500 million shortfall.

The Rhode Island state retirement board has voted 12-1 to lower its assumed rate of investment returns and inflation, a move the treasury says will help the state save an estimated $500 million.

The retirement board approved lowering the overall assumed rate of return to 7% from 7.5%, lowering its real return assumption to 4.5% from 4.75%. It also agreed to lower the assumed rate of inflation to 2.5% from 2.75%.  The state treasury estimates that lowering the assumptions will reduce the pension’s funded ratio for state employees to 53% from 56%.

“The Treasurer [Seth Magaziner] believes realistic assumptions are needed to adequately fund through employer contributions,” Evan England, director of communications for the Rhode Island Treasury told CIO. “And this is how we make sure we don’t find ourselves on the brink of a crisis.”

England said the consensus at the Treasury was that the assumption changes had been overdue.

“Capital markets are not showing the same go-for it expectations they were 10 years ago,” said England, who pointed out that the inflation rate was likely even more unrealistic than the investment assumptions had been. “We haven’t seen that kind of inflation environment for quite some time.”

England also said that Magaziner was confident that the assumption changes would mean that it won’t be necessary to make changes in pension benefits. He added that the treasury projects that over 30 years it will avoid a $500 million shortfall that would have existed if the assumption rates were left unchanged.

Meanwhile, the Rhode Island Pension Fund reported that it earned $79 million from investment gains for the month of April.

“We are implementing our “Back-to-Basics” investment strategy which is designed to provide more growth and greater stability through more traditional investments,” Magaziner today told the State Investment Commission.  “Since we adopted “Back-to-Basics” we have seen consistent gains and are ahead of schedule in the move away from hedge funds.”

Magaziner added that “staying focused on long-term growth and stability will help us restore the health of our pension system and ensure that we never have to go through another painful pension reform like the one in 2011.”

With two months left in the state’s fiscal year, the fund has returned 9.8% since July 1, 2016, beating its benchmark of 9.5%, and a 60% stock/40% bond portfolio, which would have earned 8.8% in that time.



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