Illinois State Employees cuts return assumption to 7.75%

Illinois State Employees’ Retirement System, Springfield, lowered its assumed rate of return on investments of its $9.4 billion fund to 7.75% from 8.5%, a move that will cause a significant rise in state pension contributions, said Timothy B. Blair, executive secretary.

The board put the new assumption in effect immediately, instead of waiting until the start of the next fiscal year, July 1.

“With the fund in the situation it is in (with a need for liquidity) and the financial market downturn, the board had concern about being too aggressive in the assumption,” Mr. Blair said. In lowering the assumed return, the SERS board was concerned about the current liquidity needs of the system because the state hasn’t made any of its required $1.19 billion in annual pension contribution to the retirement fund since the start of the fiscal year on July 1. Mr. Blair said. As a result, the $10 billion Illinois State Board of Investment, Chicago, which oversees SERS, has had to sell $90 million in investments a month to pay pension benefits, an asset liquidation the two entities plan to continue monthly until the state begins paying its contributions, Mr. Blair said.

“The board has expressed concern whether ISBI would be able to consistently achieve that 8.5% rate,” Mr. Blair said.

For the 10 years ended Sept. 30, ISBI returned an annualized 2.7% actual return on investments, Mr. Blair said.

Gabriel Roeder Smith, the system’s actuarial consultant, estimated ISBI’s chances of achieving an annualize investment return of 8.5% over the next 20 years was 36%, Mr. Blair said.

GRS didn’t calculate the return of achieving the new assumed rate, Mr. Blair said.

The lowering of the assumed return will cause a rise in state contributions. “I think it will be significant,” Mr. Blair said. “I can’t say how much” until the board’s Nov. 10 meeting when it and Gabriel Roeder Smith certify the required state contribution for fiscal year 2012, which begins July 1, 2011.

ISBI also oversees the assets of the $500 million Illinois Judges’ Retirement System and the $100 million Illinois General Assembly Retirement System, which both have assumed rates of 8%, Mr. Blair said. The boards of the two Springfield-based systems plan to meet Friday and Nov. 17, respectively, to decide whether to change their return assumptions, Mr. Blair said.

William R. Atwood, ISBI executive director, said the board and Marquette Associates, its investment consultant, are undertaking an asset allocation study of all of ISBI’s plans to restructure the investments to achieve a new lower rate.

ISBI expects to make a decision on the new allocation in December, when it will also know whether the state plans to fund any of its required pension contributions, Mr. Atwood said.

The new rate “gives us the ability to take risk off the table” in terms of the asset allocation, Mr. Atwood said. “It is a more manageable number than 8.5%” for achieving the investment goal, he said.

The board could adopt for all the plans it oversees a “more conservative portfolio, so we would be less aggressive in reaching for return” and “we can keep assets more liquid,” Mr. Atwood said. For example, it could mean less small-cap equity and more large-cap equity, less private equity and less real estate, and more core bonds, Mr. Atwood said.