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On March 20, 2024, the National Association of State Retirement Administrators (NASRA) updated its standing issue brief, Public Pension Plan Investment Return Assumptions. NASRA examined public pension investment return data and found that recent changes in economic and financial conditions have caused many public plans to reexamine their investment return assumptions.  

Since fiscal year (FY) 2010, all of the 131 plans measured have reduced their assumed rate of return with 94 of those plans (72%) doing so since FY 2020. For the 131 plans, the average return assumption is 6.91% in FY 2023 down from 7.33% in FY 2018. The brief also provides a table showing the investment return assumptions that are in use, or announced for use, by the 131 plans included in the Public Fund Survey as of March 2024.   

In addition, the brief also discusses how the investment return assumption is established and evaluated. Then, it compares these assumptions with public funds’ actual investment experience and the challenging investment environment for public retirement systems.   

The brief emphasizes that a governmental plan’s investment return assumption is focused on the long-term, typically an investment horizon of 30 to 50 years. Investment returns are important because investment earnings account for a majority of the revenues received by most public pension plans. According to the brief, since 1992, public pension funds have accrued an estimated $10.4 trillion in revenue. Of that amount, investment earnings account for $6.5 trillion (63%), employer contributions account for $2.7 trillion (26%), and employee contributions account for $1.1 trillion (11%).   

Typically, a 25-basis point reduction in the investment return assumption will increase the cost of a plan that has a cost-of-living adjustment (COLA) by 3% of pay (i.e., a reduction from 7.5% to 7.25% will increase the cost from 10% to 13% of pay). For a plan without a COLA, the return assumption will increase the cost by 2% of pay.  

The brief concludes, “In terms of its effect on a pension plan’s finances and funding levels, the investment return assumption is the single most consequential of all actuarial assumptions. The sustained period of historically low interest rates, which lasted for over a decade beginning in 2009, combined with lower projected returns for most asset classes, caused many public pension plans to reduce their long-term expected investment returns.”   

In addition, the brief contains two appendices with: 1) the current nominal investment return assumption used in the 131 public pension plans in NASRA’s dataset; and 2) the entity responsible for setting the investment return assumption for each plan. 

The brief is available here.