Virginia Will Lower Assume Rate of Return for Its Retirement Fund

The state’s system will make changes to asset allocations and benchmarks, too.

The Virginia Retirement System is lowering its assumed rate of return to 6.75% from 7% following a Thursday board meeting. The change is in effect retroactively as of July 1, 2019. The $82 billion system, based in Richmond, reportedly made the change based on the recommendation of Verus, a consulting firm.

The system is also making modifications to asset allocation and will revise several benchmarks to be less reliant on public funds. The notable new long-term targets are 34% public equity, 15% fixed income, and 14% credit strategies. These new benchmarks will go into effect Jan. 1, 2020.

For public equity, Virginia is turning to a new MSCI ACWI IMI index, leaving behind a 50% hedged index for one that is not hedged and a peer universe index for hedge funds. For credit strategies, the state will use a benchmark of 60% S&P/LSTA Performing Loan index, 30% ICE BofAML BB/B US High Yield Constrained index, and 10% Bloomberg Barclays US Aggregate Bond index.

In fiscal year 2019, the system received a 6.7% return on its portfolio. The private equity program returned 14% and fixed income 8.3%. Other high-performing major asset classes were real assets and credit strategies.

The Center for Retirement at Boston College found that public plans invest a larger share in risky assets than private plans. From 2009-2015, public plans had 72% in risky assets, with 50% in equities and 22% in alternatives. Private plans had 62% in risky assets, with 44% in equities and 18% in alternatives.

There are reasons for the disparity in the share of risky assets. Risk tolerance tends to be lower for more mature plans. Other reasons include the health of a plan—risk may be reduced to lower the potential for default. Smaller plans may be more able to cushion risky investments. The higher a return, the less likely a plan may turn to risky assets. Other factors include the health and debt obligations of plan sponsor.

There is a reckoning occurring over overly rosy expectations. The University of California Board of Regents recently dropped its expected rate of return. Lower inflation projections and a looming recession are also triggering the decline. When inflation falls, the level of benefits also falls and plans make downward adjustments.

In March, a Virginia Retirement System report found that the state’s pension fund is less prepared today for a market crash than it was before the financial crisis, when its funding status fell nearly 25%. The state’s pension plan would see an increase in unfunded liability of about $6.9 billion.


Related Stories:

The University of California Pension Fund Lowers Expected Rate of Return


Virginia Pension in Worse Shape to Weather Crash than in 2008

California, Texas, Virginia Endowments Report 2018 Returns


Tags: Virginia Retirement System, Fiscal Returns, pension, private equity, public equity, University of California

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