Investment returns make up more than 60 percent of the revenues that public pension plans need to ensure their financial stability, so it’s imperative that funds apply accurate return assumptions when calculating required funding levels. That’s why many have lowered those assumptions to reflect expectations of slower economic growth in the years ahead.
During the bull markets of the 1980s and 1990s, managers of state and local pension funds commonly assumed that they would earn at least 8 percent returns on their investments over the long term. For the most part, this reflected the prevailing market outlook as the United States experienced annual gross domestic product (GDP) growth of more than 5.5 percent from 1988 to 2007.
However, the Congressional Budget Office (CBO) now projects only 4 percent annual growth for the next decade. With more modest expectations, consensus is rising among government and industry economists that pension funds will see lower long-term investment returns over the next 10 to 20 years. […]
Pew’s data, published in a December 2019 issue brief titled “State Pension Funds Reduce Assumed Rates of Return,” show that many plans lowered their assumed rates of return over the past 10 years to reflect these economic realities, despite the near-term budget challenges they face as contribution requirements rise.
Only nine of the 73 funds studied had an assumed rate below 7.5 percent in 2014, but about half had adopted rates below that percentage by the end of fiscal year 2017. Forty-two reduced their assumed rate in 2017 to better account for lower expected investment returns. And several states—including California, Georgia, Louisiana, Michigan, and New Jersey—adopted multiyear strategies to ramp down assumed rates over the next several years.
Read the whole article from Pew Charitable Trusts.
This article quotes selections from “Pension Funds Adjust Investment Return Targets as Economic Growth Slows,” by Susan Banta and Keith Sliwa for Pew Charitable Trusts, January 8, 2020.