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Pension Funds

New Jersey lowers assumed rate of return to 7%

The New Jersey Statehouse in Trenton

The New Jersey Pension Fund's assumed rate of return has been reduced to 7% from 7.65% by state Treasurer Ford M. Scudder, the second rate cut he has enacted this year.

The reduction was announced Tuesday to board members of the seven pension systems that are part of the $76.6 billion New Jersey Pension Fund, Trenton, confirmed Willem Rijksen, a Treasury Department spokesman.

"The 7% assumed rate of return is effective with the June 30, 2017, actuarial valuations," which will be used for determining the pension contributions for fiscal year 2019, starting July 1, 2018, Mr. Rijksen wrote in an email.

Mr. Scudder had cut the rate to 7.65% from 7.9% in February 2017.

"Given the current elevated level of asset values across the board, long-run expected returns have diminished, so it is appropriate to lower the assumed rate of return," Mr. Rijksen wrote. "Our actuaries have suggested doing so, and it is the unmistakable trend in public pension plans across the country."

Mr. Rijksen added that the need to reduce the assumed rate of return "is especially true in light of the promises of the governor-elect to eliminate alternative investments from the pension fund, as they have been and are expected to be a major source of added return."

He was referring to Gov.-elect Phil Murphy's criticism of the division of investment's investing strategy for the New Jersey Pension Fund. In his campaign platform, Mr. Murphy said the pension fund should "divest from private equity and hedge funds," adding that "these investments have cost us hundreds of millions in fees while delivering only middling results."

The division of investment, a unit of the Treasury Department, has been cutting its allocation to hedge funds from 12.5% at June 30, 2016, to a goal of 6% by Dec. 31, 2018.

For the three years ended June 30, 2017, the overall pension fund's annualized return was 5.25%. Of the five asset categories that outperformed the total fund, four were alternative investments — buyouts/venture capital, real estate, global diversified credit and debt-related private equity.

For the 12 months ended June 30, 2017, the overall return was 13.07%. Two of the five categories topping the overall return were alternative investments — equity-oriented hedge funds and global diversified credit.

Reducing the assumed rate of return "is an issue the treasurer has studied in consultation with the directors of the divisions of investment and pensions and benefits, as well as the chairman of the State Investment Council, for the past two years," Mr. Rijksen wrote.