NASRA: Public plans exceed assumed rates of return over time

Public defined benefit plans are lowering their assumed rates of return in record numbers, even though most public plans are meeting or exceeding those rates over time, according to a new issue brief from the National Association of State Retirement Administrators.

Since fiscal year 2008, 43 public pension funds have reduced their investment return assumptions. For the 126 plans included in NASRA's Public Fund Survey, the predominant rate remains 8%, but drops to 7.75% when weighted by asset size, with larger plans having lower return assumptions.

Despite economic downturns and negative investment returns in recent years, public pension funds have exceeded their assumed rates of return over longer periods, the brief states. For the 25-year period ended Dec. 31, the median annualized investment return was 8.3%.

For the one-year period ended Dec. 31, the median return rate was 0.8%, which jumped to 11.4% for a three-year period, then dipped to 2% for five years, rising again to 5.7% for 10 years and 7.7% for 20 years. The multiyear returns are annualized.

Return assumptions “are intended to reflect long-term expectations, including projections for investment return in different asset classes,” said Keith Brainard, NASRA research director, in an interview.

But public employee advocates worry that political pressure on more plans to lower their return expectations won't stop. “There is incredible pressure that is driven more by ideology than by fact,” Steve Kreisberg, director of collective bargaining for the American Federation of State, County and Municipal Employees, said in an interview. “We think it is particularly inappropriate when you start to reduce the rate of return to not look at salary growth or the lack of it, and payroll changes. You have to look at all the actuarial assumptions.”

Of the $4.8 trillion in revenue that public pension funds have accrued since 1982, 61%, or roughly $2.9 trillion, has come from investment earnings, according to the NASRA brief. Employer contributions account for 26%, and employee contributions account for 13%.