Illinois Teachers' Retirement System, Springfield, lowered its assumed rate of return to 7% from 7.5% starting with the fiscal year beginning July 1, 2017, at a board meeting Friday.
After analysis, the $44.6 billion pension fund's actuarial consultant, Segal Consulting, recommended the pension fund reduce its expected rate of return based on the assumption that the inflation rate will drop to 2.5% from 3% by the time the new rate goes into effect, and that the pension fund's real rate of return net of investment fees will be 4.5%.
The move was controversial because the lower rate of return will increase Illinois' statutory state contribution for fiscal year 2018.
For example, Segal calculated that applying the 7% assumed rate to the fiscal year ending June 30, 2017, the state's statutory contribution to the pension fund would increase by $421 million to $4.28 billion, compared to the previous assumed rate of return. Segal used 2015 data, the most recent available, for the calculation.
Richard W. Ingram, executive director, told trustees: “I am comfortable with the 7% rate of return because it's the first bite of the apple. We have a lot of work ahead of us,” adding that he expects that the board might have to lower the assumed rate of return even further next year.
“This is the reality we are living in,” Mr. Ingram said, noting that the pension fund has not received actuarially adequate contributions from the state for 70 years.
Separately, R. Stanley Rupnik, chief investment officer, provided preliminary gross annualized returns of the pension fund for the fiscal year and other time periods ended June 30: three months, 2.1% (benchmark, 1.7%); one year, 0.8% (2.4%); three years, 7.6% for the pension fund and the benchmark; five years, 7.4% (7.5%); 10 years, 6% (5.9%); 20 years, 7.7% (7.1%); and 30 years, 8.8% (7.7%).
Mr. Rupnik said final gross and net returns for periods ended June 30 will be provided once all asset class returns, including illiquid strategies such as private equity and real estate, are finalized.
