Thomas Aaron, a vice president and senior analyst at Moody’s Investors Service Inc. in Dallas, said in a video interview that from a credit perspective, New York’s decision to lower its assumed rate is “an overwhelmingly positive move.”
“This is an opportunity to lower risk on the heels of strong investment returns,” Mr. Aaron said. “Lower return targets mean higher contribution targets, which can be budgetarily painful. And this recent asset boost ... can offset what would be an increase in contributions.”
In February, the Raleigh-based North Carolina Retirement Systems announced it was lowering its assumed rate of return to 6.5% from 7% for the principal pension fund even though it posted a 19.1% fiscal-year return.
North Carolina Treasurer Dale Folwell said that although the plan is one of the best funded in the U.S. (86.8% as of Dec. 31), “we have not achieved our assumed rate of return for 22 years” on average, over the long term.
This is the third time the assumed rate of return has been lowered during Mr. Folwell’s tenure as treasurer, having been reduced to 7.2% from 7.25% in 2017 and to 7% in 2018.
The goal is to get the plan funded at 100%. It was 110% funded in 2001, but 9/11, followed by the global financial crisis, has prevented the plan from reaching that funding level since, he said.
“You need to be more realistic,” Mr. Folwell said. “And as well-funded as our plan is, it has headwinds. Zero interest rates, longer life expectancies and earlier retirement ages. All blessings, but certainly headwinds” for the plan.
Lower inflation, and lower projected future inflation, has been another major factor that’s been driving plans to reduce their assumed rates of return over the past decade.
“Inflation has spiked higher in recent months, and time will tell if higher inflation is durable or transitory,” said Alex Brown, research manager for the National Association of State Retirement Administrators in Washington, in an email.
Despite many plans also seeing strong three-, five- and 10-year fiscal returns, Mr. Brown noted that lower investment returns “continue to be projected for most major asset classes in which public pension funds are invested,” which is another driver of lower assumed rates of investment return.
“Like all projections, these are imprecise, and their accuracy can be affected by unforeseen developments,” Mr. Brown said. “That most plans have exceeded their assumed rates of return for 10- and 20-year periods does not invalidate these projections, as that experience is in the past and lower returns are still expected by most forecasters to materialize in the future.”