New York State’s Common Retirement Fund is set to lower its assumed rate of return on investments from 6.8 percent to 5.9 percent. This change shows the pension plan expects that, over the long-term, investment returns will be lower than previously expected.
The New York State Common Retirement Fund has nearly $270 billion in assets, making it the country’s third-largest public retirement fund. The plan’s new assumed rate of investment return of 5.9 percent will be the second-lowest investment return assumption among the country’s 130 largest state and local pension plans. The average assumed rate of investment return for state and local pension plans hovers around 7.2 percent.
A plan’s assumed rate of return is the most important assumption for a pension fund. If a fund realizes long-term investment returns below its assumed rate, the pension plan’s assets will not grow to the levels predicted and it will lead to growth in unfunded pension liabilities. It is significantly easier for a pension plan to meet a lower investment expectation over the long term, therefore a lower assumed rate of investment return greatly reduces a plan’s risk of accruing pension debt.
New York’s move to a 5.9 percent assumed rate of return (ARR) will put the system’s rate well below the nation’s average of 7.2 percent but the national average hardly reflects the realities of investment returns. In the last 20 years, the median actual rate of investment return for state public pension plans was only 5.7 percent.
For years, New York state policymakers have been proactively aligning the plan’s ARR with realistic market return expectations. The New York State and Local Retirement System (NYSLRS), which manages the Common Fund and pays out pensions to state employees, local employees, police officers, and firefighters, lowered its ARR from 8 percent to 7.5 percent in 2010, down again to 7 percent in 2015, and then down to 6.8 percent in 2019. While most public pension plans have lowered their assumed rates of return over the last decade very few have made as drastic and consistent changes as New York.
NYSLRS’s move to lower its assumed rate of return became public after the system released its investment gains from its fiscal year from April 1, 2020, to March 31, 2021, which came in at an astounding 33.5 percent. This is a stark contrast to its 2020 return of 4.4 percent—an illustration of the potential investment return volatility pension plans face from year to year.
In an interview with Bloomberg, New York State Comptroller Thomas DiNapoli said that the new assumption for investment returns will “help us weather whatever the next downturn will be.” He also mentioned that the pension plan could be in a better position long-term “because of the outsized returns that we’ve had in the past year.”
More states should be lowering their public pension systems’ investment return expectations to prevent further accumulation of unfunded liabilities. When pension plans keep their assumed rates of return too high and out of touch with long-term market realities, it hides the real cost of public pension benefits.
With many retirement plans are seeing high investment returns in 2021, now is a good time to adjust return rate assumptions to better match what investment experts are predicting for the next few decades. Following New York State’s lead would greatly reduce the risk of further public pension systems accruing more debt and could help put many pension plans back on track to solvency.
Stay in Touch with Our Pension Experts
Reason Foundation’s Pension Integrity Project has helped policymakers in states like Arizona, Colorado, Michigan, and Montana implement substantive pension reforms. Our monthly newsletter highlights the latest actuarial analysis and policy insights from our team.