Texas Teacher Retirement System, Austin, lowered the assumed rate of return for the $151.3 billion defined benefit plan to 7.25% from 8% at a board meeting Friday.
The vote by the fund's board was 5-4. The measure also includes a decrease in the inflation assumption to 2.3% from 2.5%, a webcast of the meeting showed.
The proposal was drafted by the fund's actuary, Joseph Newton, pension practice leader at Gabriel, Roeder, Smith & Co., and was based on an experience study.
In preparing the study, TRS and GRS sought input from the board's consultant, Aon Hewitt Investment Consulting, other large pension funds and investment managers about market forecasts over the next 10 to 20 years.
Aon's expected annualized rate of return over 30 years, for example, was 7.27%, and its 10-year forecast was 7.21%, board materials showed.
Brian Guthrie, TRS executive director, told trustees the consensus among outside parties was that market returns will be significantly lower, and he stressed that "not taking action" to lower the assumed rate of return would not be prudent.
Lowering the fund's assumed return rate has been debated by board trustees for a year. It is controversial because lower return rates will require higher contributions from the state, TRS members and school districts.
The Texas Legislature has the authority to set contribution rates. TRS will request a contribution rate increase of between 1.5% and 2% in its next budget request, fund materials showed.
The impact of the drop in the assumed return rate would increase state contributions to the pension fund by 1.83% or about $790 million per year over a 31-year funding period, according to estimates in a news release from the Texas Retired Teachers Association, Austin.
On Thursday, retired educators from Texas American Federation of Teachers, Austin, staged a protest in front of TRS headquarters against the reduction.
In a statement, the Texas AFT said: "Any reduction in projected investment income would make it more difficult to provide any increase in benefits without a significantly higher contribution rate from the state (and/or active employees and school districts)."
Texas AFT members were among 17 active and retired educators who spoke in opposition to the lower return during the public comment period, the webcast showed.
Timothy Lee, executive director of the Texas Retired Teachers Association, warned TRS trustees during Friday's meeting to expect a "huge effort to change TRS into a defined contribution plan rather than have the Texas Legislature increase contributions," noting that proponents of the shift to a DC plan are "well organized."
Separately, the board approved the recommendation of TRS' investment management division to rehire Aon Hewitt Investment Consulting as its investment consultant for five years beginning Sept. 1 with an option to extend the contract by two years.
Albourne America also was rehired for the same five-year period with an optional two-year extension as consultant for private and external public market strategies, including hedge funds, real estate and private equity.
Both firms' existing contracts expire Aug. 31.
The contracts of real estate consultant Townsend Group and private equity consultant Hamilton Lane Advisors, which expire Aug. 31, will not be renewed, said Robert Maxwell, a TRS spokesman, in an email.