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Iowa Public Employees cuts assumed rate of return to 7%

Iowa Public Employees’ Retirement System, Des Moines, lowered its assumed rate of return to 7% from 7.5%, said a news release from the $28.5 billion pension fund.

The pension fund board at its March 24 meeting also lowered its inflation assumption to 2.6% from 3% and its wage growth and payroll growth assumptions to 3.25% each from 4%.

Under the changes, the pension fund’s funding ratio is expected to fall by roughly four basis points to 80% and liabilities are expected to increase by $1.4 billion.

The changes follow a review of economic assumptions from actuarial firm Cavanaugh Macdonald Consulting.

“Even though these changes will have a negative impact on IPERS’ funded ratio, the investment board believes that these modifications will provide a more accurate valuation of future liabilities,” IPERS said in the news release. “Each year an investment return is less than the assumed return adds to the liability and increases the needed return in future years, which can lead to even higher contribution rates.”

The new assumptions will be used in the pension fund’s June 30, 2017, valuation and will be used to determine contribution rates effective July 1, 2018.

For the fiscal year ended June 30, 2016, the pension fund returned 2.15%, below its policy benchmark of 2.89%. For the three, five and 10 years ended June 30, 2016, the pension fund returned an annualized 7.17%, 7.06% and 6.31%, respectively, vs. its benchmark returns of 7.11%, 7.4% and 6.71% in each of those periods.