NASRA: Public Pension Investment Return Assumptions Add to Plans’ Challenges

By John Iekel • February 28, 2017 • 0 Comments
Public pension plans across the country face many challenges, to put it mildly — and among them, says a recent report, are the investment return assumptions for those plans.

In “NASRA Issue Brief: Public Pension Plan Investment Return Assumptions,” the National Association of State Retirement Administrators discusses the short- and long-term assumptions regarding anticipated returns on the investments made with those plans’ funds.

The stakes are high — for plan participants and their dependents, of course, but also for taxpayers whose funds may need to shore up those plans.

Why do investment return assumptions matter? The NASRA report notes that U.S. Census Bureau data indicates that for the period 1986-2015, investment earnings were the largest source of revenue for public pension plans, comprising 63% of those earnings, or $4.3 trillion.

Compounding the pressure are public pension plan funding shortfalls, which abound, and exacerbate the stress on state and local governments. In October 2016, Moody's said that by June 30, 2016, the 100 largest U.S. public pension plans were just under 70% funded, and that state plans’ unfunded liabilities would grow to $1.75 trillion through fiscal 2017. A recent report by Wilshire Trust Universe Comparison Service said that the funded ratios for public plans improved in the last two months of 2016; nonetheless, shortfalls remain. And that heightens the importance of realizing a strong return on investments of plan funds in order to bolster and improve the funding status — and ability to pay benefits — of public plans.

The NASRA report implies that patience will pay off for public pension plans. It says that “a growing number” of projections regarding investment returns conclude that returns will be “materially lower” than historic normal levels, but only in the short term — they will be better in the long run.

But exercising that patience is not an easy matter, says the report. The possibility of short-term returns weaker than those farther in the future, NASRA says, poses a difficult choice for some plans — maintain a return assumption higher than expectations for the near future, or cut investment return assumptions so they align with short-term expectations.

NASRA concludes that the low interest rates that have held sway since the Great Recession have led to “many” public plans reevaluating the long-run investment returns they expect and an “unprecedented number” of reductions in the investment return assumptions those plans make.

And lower return assumptions have an additional consequence, NASRA says — they increase plans’ unfunded liabilities and cost.