The $124.8 billion New York State Common Retirement Fund, Albany, is the latest in what could be a long list of public funds to cut their assumed rates of return as officials begin to acknowledge that volatile market conditions will have a long-term effect on future investment returns.
“We're obviously still in an uncertain time, particularly in public equities,” New York state Comptroller Thomas DiNapoli said Sept. 2 after announcing his decision to cut the rate 50 basis points to 7.5%.
Public pension funds that already have dropped their return assumptions include:
• The $47.7 billion Virginia Retirement System, Richmond, which approved a reduction to 7% from 7.5% in June;
• The $7.3 billion San Diego County Employees Retirement Association, which lowered its assumed rate of return to 8% from 8.25% in May;
• The $25 billion Pennsylvania State Employees' Retirement System, Harrisburg, which cut its rate to 8% from 8.5% a year ago; and
• The $35 billion Colorado Public Employees' Retirement Association, Denver, whose assumed rate of return fell to 8% from 8.5% last September.
Colorado officials are reviewing the return assumption again, and will discuss the issue during their Sept. 15-17 annual planning meeting, a spokeswoman said.
New York's Mr. DiNapoli said that based on his conversations with colleagues across the U.S., it's likely other public pension plans will be making similar moves over the next few months.
“A more conservative approach makes sense given what the plans have been experiencing,” he said.
Investment consultants agree that market conditions aren't very promising.
“Going forward, the return expectations have to be somewhat muted,” said Erik L. Knutzen, chief investment officer at NEPC LLC, Cambridge, Mass.
Mr. Knutzen said equity markets are not expected to achieve strong results over the next five to seven years and Treasury bonds have been near historic lows. The modest spreads between Treasuries and corporate issues also mean limited opportunities in that sector, he said.
Officials at other public pension funds are expected to make decisions on their return assumptions during the next few months — including the nation's two largest, the $206.7 billion California Public Employees' Retirement System and the $134.3 billion California State Teachers' Retirement System.
Their decisions could help chart a course for smaller plans, but not without controversy.