This month, Horizon Actuarial Services released its 2021 Survey of Capital Market Assumptions. This survey includes short- and long-term expectations for public pension investment returns and investment risks from 39 advisors, such as JPMorgan, BlackRock, and Vanguard. Public pension plan actuaries frequently reference the Horizon survey as they advise on assumed rates of investment returns, produce valuation reports and write experience studies.
The 2021 Horizon Actuarial Services survey shows that despite the historic positive investment performance that public pension plans have seen in the last year, not much has really changed in terms of future and long-term investment outlook. In fact, financial advisors seem to have further reduced their capital return assumptions to offset the recent favorable gains. Below are a few of highlights from the survey.
Compared to last year, the long-term expected investment returns decreased across the main asset classes that public pension plans invest in. The report says:
“Over the last five years, expected returns have declined for all but a few asset classes. The steepest declines have been for fixed income investments such as US corporate bonds and Treasuries, where return expectations have fallen more than 100 basis points since 2019. These declines were driven by recent monetary and fiscal policy interventions, and may have significant implications for multiemployer pension plans.”
The chart below, taken directly from the report, shows each asset classes’ decline in the last few years.
The survey also says that the likelihood that pension plans will meet high investment return targets is falling. For a hypothetical pension fund, the probability of meeting a 7% return target given average market returns over the next 20 years dropped to 38% from about 45% last year, Horizon says. The most conservative market returns gave pension plans less than a 20% chance of meeting 7% investment returns over 20 years.
Short-term investment outlooks seem to be worse than long-term prospects, which still aren’t great. The Horizon table below shows that 10-year expected returns are markedly lower than 20-year expected returns. This means the probability that plans achieve certain benchmarks are also significantly lower for the next decade. Again, this is for a hypothetical multi-employer pension fund.
Source: Horizon Actuarial 2021 Survey of Capital Market Assumptions
The individual assumptions from each of the 39 advisors are plotted below.
Overall this Horizen survey further supports financial experts’ predictions about a depressed investment market in the next 10 to 20 years.
Despite 2021’s excellent investment returns, policymakers should not lose sight of the fact experts are saying the long-term investment prospects look bleak. Now is the time for cities and states to consider needed reforms that would properly manage the investment risks facing their public pension plans.
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