New York pension funds take different approaches to setting rates of return

The largest public pension plans in New York — among the biggest in the country — take different approaches to setting assumed rates of return, with each producing a different result and each having a different person or persons setting the rate.

At the New York State Common Retirement Fund, Albany, state Comptroller Thomas P. DiNapoli, the sole trustee, has the final word after consulting with internal and external experts. The $242.3 billion pension fund set an assumed rate of return of 5.9% that took effect April 1, 2021, down from 6.8%.

For the New York State Teachers' Retirement System, Albany, the 10-member governing board signs off on an assumed rate of return after consulting with internal and external experts and actuaries. The $129.6 billion fund announced in December 2021 a reduction to 6.95% from 7.1%.

At the New York City Retirement Systems, city Comptroller Brad Lander, the fiduciary to the five pension funds within the $248.2 billion pension system, is basically a bystander for rate-setting. Any change in the assumed rate of return must be approved by the state legislature and signed by the governor.

The current assumed rate of return of 7% is the same for each of the five pension funds in the city system. The combined funded ratio for the five pension funds in the city system is 80%, and individual fund ratios range from 69% to 96% on a market value of assets basis.

Changing or keeping the rate is based on a recommendation by the office of the city actuary, a city agency separate from the comptroller's and mayor's offices.

Chief Actuary Marek Tyszkiewicz has recommended that the pension funds keep the 7% rate assumption for two more fiscal years starting July 1. If the legislature delays acting, the existing rate remains in force.

In an email, Mr. Tyszkiewicz explained that his recommendation is based on historical returns and surveys of comparable pension systems.

It also is based on an evaluation by the city comptroller's actuarial auditor as well as surveys of long-term expected returns by each of the five pension funds' investment consultants, he wrote.

Mr. Tyszkiewicz said that the trustees of each of the five city pension funds have endorsed his recommendation, which has been sent to the city law department in the mayor's office to draft the necessary legislation.

"Interaction with the legislature about assumed rate of return legislation is traditionally done by the mayor's Office of Intergovernmental Affairs," Mr. Tyszkiewicz wrote. A representative for Mayor Eric Adams did not return requests for comment. It could not be determined if the office has prepared legislation.

Mr. Tyszkiewicz added that an actuarial audit is conducted for the comptroller's office every two years, and the next one is due March 2025. If the two-year extension of the 7% assumed rate remains through June 30, 2025, his office can "re-evaluate the assumptions once the report is issued."

The assumed rate of return for the New York State Teachers' Retirement system has been trimmed steadily since reaching a peak of 8% during the 1988-2014 fiscal years. Since then, the rate has been cut four times, culminating in 6.95%, which the pension system described as based on industry forecasts of lower expected future investment returns. The funded ratio is 97.4% on a market value of assets basis.

"Economic projections are important," said Richard Young, the chief actuary. "We look at the past, but we are more interested in the future."

In preparing an assumed rate of return proposal, Mr. Young looks at the pension system's asset allocation as well as the expected long-term rates of return for each asset class. Forecasts from consultants may be part of the consideration.

For example, Callan LLC, its investment consultant, provides the pension system with asset class forecasts over 20-and 30-year periods. Also, Cheiron, an actuarial consultant, provides a model containing more than 5,000 investment outcomes based on the system's asset allocation.

Other factors in the system's calculations include mortality rates, the rates of salary increases, and the rates for retirements and terminations.

Mr. Young said the pension system's projections are built to absorb the impact of temporary economic shocks. The system's 30-year forecast for assumed rates of return is reviewed every year.

Mr. Young said it was possible the assumed rate could be increased if inflation remains high and chronic. "We're not there yet," he said. "Our consultants have been telling us inflation is more transitory."

The New York State Common Retirement's assumed rate of return of 5.9% is one of two that are below 6%, according to the National Association of State Retirement Administrators database of 131 plans.

When the rate reduction was announced, a spokeswoman for Mr. DiNapoli said the action was taken "to set realistic return assumptions that result in stable contribution rates at a sufficient and sustainable level for employers."

The assumed rate of return has been cut from 8% in 2010 to 7.5% in 2015, to 6.8% in 2019 and to 5.9% in 2021. The funded ratio is 102.9% based on a market value of assets. The pension system focuses on economic projections from outside consultants as well as internal models, explained Aaron Young, the chief actuary for the retirement system. Asset allocation plays a prominent role in calculations, he added.

Although the state legislature doesn't play a role in rate-setting, it can influence calculations through laws that affect the pension system. For example, New York enacted a law in December that allows public pension plans to increase their allocations to alternative investments to 35% from 25%.

The pension system uses a 30-year projection — "it tends to represent members' careers" — which is reviewed annually, said Mr. Young (who isn't related to Richard Young of the New York State Teachers Retirement System). His office also conducts "a more investigative analysis" every five years that includes a review of demographics and other participant trends.

An August 2021 actuary report noted that "it is customary to avoid assumption changes" between the five-year reports. "Annual tinkering with assumptions belies the long-term nature of pension funding," the report said.

Mr. Young said it was possible sustained high inflation could lead to a raising of the assumed rate of return, but "short-term changes (in inflation) would not affect our forecast."