Public pension funds taking a new look at return assumptions

Concerns about the investment horizon are leading executives at some public pension plans to scale back or consider reducing their assumed rate of return.

In some cases, a reduction would be the second in several years.

The board of the $71 billion Oregon Public Employees Retirement Fund, Salem, lowered its return assumption to 7.5% from 7.75% on July 21. Two years earlier, the board had moved the assumption to 7.75% from 8%.

John Skjervem, chief investment officer of the investment division of the Oregon State Treasury, said that while Oregon is a long-term investor in regard to its pension plan, capital market assumptions for the foreseeable future — such as the extreme compression in the yield curve and limited prospects for change — can't be ignored.

“Fixed-income returns aren't very inspiring,” he said.

New York State Comptroller Thomas DiNapoli also is considering lowering the 7.5% return assumption for the $181.7 billion New York State Common Retirement Fund, Albany.

Spokesman Matthew Sweeney said in an e-mail that such a move is under discussion, pending a recommendation from the retirement system's actuary. He said a decision could occur in September.

Mr. DiNapoli is the sole trustee of the retirement plan and would be able to directly make the change.

In North Carolina, the issue also has come up. The state Senate included a budget proposal to lower the rate to 7.2% from its current 7.25% this year and make further reductions in the future.

Schorr Johnson, a spokesman for State Treasurer Janet Cowell, sole trustee of the $90 billion North Carolina Retirement System, said Ms. Cowell opposes the provision because it is “arbitrary “and would mandate reductions without an actuarial review.

While the treasurer is the retirement system's sole trustee, the Legislature determines broad asset allocation issues, Mr. Johnson said.

“We acknowledge that hitting the 7.25% will become increasingly difficult in the next 15 years, but we are projecting to reach it over the 20- to 30- year horizon,“ Mr. Johnson said.

Staff of the nation's largest defined benefit plan, the $301.5 billion California Public Employees' Retirement System, Sacramento, also has come up with a plan to lower the system's assumed rate of return from 7.5% to 7% or 6.5%. The system's board could approve the plan by the end of the year.

But CalPERS' plan proposes gradual reductions that could take 20 to 30 years to achieve.