Just a few months after the New York Common Retirement Fund (NYCRF) lowered its assumed rate of return (ARR), New York’s teacher pension plan is making similar changes.
The New York State Teachers’ Retirement System (NYSTRS) is scheduled to lower its assumed rate of return from 7.1% to 6.95%, beginning July 1, 2022. The pension system has nearly $120 billion in assets and is fully funded as of its latest actuarial valuation in January 2021.
While this drop in investment expectations is a lot less drastic than the one the NYCRF took (lowering the assumed rate of return from 6.8% to 5.9%), it is still a step in the right direction. Similar to the New York Common Retirement Fund, since 2014 NYSTRS has been gradually lowering its investment expectations from 8.0%.
The assumed rate of return (ARR) is the most critical component of properly evaluating the price of funding promised pension benefits. If the public pension fund fails to meet its investment target, the pension plan’s assets will not grow enough to pay for earned benefits, therefore accumulating unfunded pension liabilities. Lowering the investment expectation target makes it easier to meet plan assumptions over the long term and allows the pension plan to invest in less risky assets. Consequently, a lower assumed rate of return reduces a plan’s risk of accumulating pension debt.
NYSTRS’s new 6.95% rate will bring the plan’s assumed rate of return below the national average of 7%. This is a timely and wise decision because, between 2001 and 2020, the median actual rate of investment return for state public pension plans was only 5.7%. Any lowering of the ARR does come with a growth in employer contributions, but the total cost of NYSTRS’s assumed rate of return adjustment is to be announced by the pension board.
NYSTRS’s decision to drop its assumed rate of return comes on the heels of the pension system’s extraordinarily high 29% investment return in the fiscal year 2021. Many retirement plans are similarly seeing high investment returns for last year. However, pension and financial experts predict that investment returns going forward are unlikely to be as promising so adjusting investment return expectations now better matches what investment experts are predicting for the next few decades. More states should join New York in lowering their pension systems’ investment return assumptions.
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