Florida Retirement System lowered its long-term assumed rate of return to 7.6% from 7.65%. The Florida State Board of Administration, Tallahassee, which oversees the $143.6 billion defined benefit plan, “supports the direction taken by the committee,” said John Kuczwanski, FSBA communications manager, in an e-mail Thursday.
However, Milliman, the retirement system's actuarial consultant; Aon Hewitt Investment Consulting, the FSBA's investment consultant; and the FSBA had “all recommended a reduction in the investment return assumption to 7.00%,” said an executive summary of the FRS' actuarial assumption estimating conference.
Milliman projects the combined 30-year long-term capital market return of the system's diversified asset allocation will be an annualized 6.6%, while Aon Hewitt projects 6.3%, according to a Milliman report presented at the Oct. 11 conference.
The pension fund has underperformed its actuarial assumed return for the one, three, five, 10 and 20 years ended June 30, according to an FSBA report. The performance ranged from 0.54% for one year to an annualized 7.29% for 20 years. Only for 25 and 30 years, when the pension fund returned an annualized 8.39% and 8.45%, respectively, did the fund's performance reach or exceed the assumed return. For all of the periods, except for 30 years, the FSBA outperformed its customized market-based benchmark return.
The Aon Hewitt, Milliman and FSBA “investment return models all indicate 50th percentile future returns materially below 7.65%,” the Milliman report said.
“While decreasing the assumption would increase actuarially calculated contribution rates (for the fiscal year beginning June 30, 2017), in our opinion it would provide a better estimate of anticipated future plan investment experience.”
FSBA estimates contributions for the current fiscal year ending June 30 at $3.1 billion, according to a report it presented.
The funded status of the pension plan was estimated at 85.4%, down from 86.5% last year, according to the executive summary.
The FRS' new 7.6% assumed rate is made up of a 4.87% real return, down from 4.92% last year, and a 2.6% inflation rate, the same as last year, the executive summary said, adding the numbers aren't additive because “real return takes into account administrative expenses.”
The median assumed return of 127 public pension funds was 7.5%, according to a February report from the National Association of State Retirement Administrators.
The new return assumption was adopted by a four-member committee of representatives of Gov. Rick Scott, who is one of the three FSBA trustees.
FSBA oversees a total of $178 billion in assets.