A pension plan’s actuarial assumption is an assumption the plan makes, based on demographic and economic information, about the investment return the plan is likely to make over future years. Public-sector pension fund investment return assumptions have been the focus of growing attention in recent years, with critics saying the current low interest rates and volatile investment markets require pension funds to take on too much investment risk to achieve their assumed rate of return. Because investment earnings account for a majority of revenue for a typical pension plan, the accuracy of the assumption has a major effect on the plan’s finances and actuarial funding level. An updated issue brief from the National Association of State Retirement Administrators points out that the median public pension annualized investment return for the 25 years ended December 31, 2013, was 9%, which comfortably exceeds the average assumption of 7.72%. Investment returns exceeded assumptions in the one-, three-, five-, and 20-year periods, as well, falling below only for the 10-year period. Another fact: public pension funds have accrued an estimated $5.3 trillion in revenue since 1982, of which $3.2 trillion, or 61%, is estimated to have come from investment earnings. Employer contributions account for $1.4 trillion, or 26% of the total, and employee contributions total $662 billion, or 13%.
Public Pension Plan Investment Returns Exceed Assumptions
Wednesday, June 11, 2014