Regarding Pensions & Investments' Dec. 10 “At Deadline” news item, “Return assumption to 5.5%” in reference to the Pennsylvania Municipal Retirement System:
The article is accurate as far as it goes, but requires context for readers to understand the basis of the recommendation Cheiron participated in.
PMRS functions as a hybrid system that is something like a mutual insurance company/self-administered retirement system. It provides pooled risk and administrative services to member municipalities. It also removes their investment and longevity risks, thus providing stable and predictable long-term funding expectations.
This is a voluntary program available to over 3,000 Pennsylvania municipalities. The cost of entry for an individual municipality is the valuation of its liabilities under the assumed return assumption. The typically higher (based on the conservative return assumption) cost is offset by the return guaranteed and cost stabilization.
The benefit of this approach is that PMRS guarantees the interest rate to participating municipalities, removing both longevity and investment risk. Thanks to this conservative approach, the 900-plus PMRS member municipalities experienced none of the adverse effects of the 2008-2009 stock market declines.
PMRS' adoption of a 5.5% assumption is a unique event tailored to the underlying promises to participating municipalities, and not indicative of rates that would be recommended for other types of plans.
Kenneth A. Kent
Principal consulting actuary