States begin paring estimates on pension investment returns

It’s been a while since most investors have seen 7 or 8 percent returns, yet the nation’s public pension funds have continued to plan based on getting such returns. Now, some states are considering a change.

Last year, the Pew Center on the States released its study “The Trillion Dollar Gap,” which showed how the nation’s public employee pension programs are drastically underfunded. Several states now are considering whether to count on smaller earnings rather than what’s been the rule of thumb of 7 to 8 percent.

Kil Huh, research director at the Pew Center, noted that a lower rate could cause headaches for the programs.

“You’ll ultimately need to set aside more money over the long term to essentially pay for those future promises that you’ve made,” said Huh. “At the end of fiscal year 2009, states had an unfunded liability of $660 billion just for their pension promises alone. If you lower that expected rate of return to 5.22 percent, about the rate of a high-grade bond, the unfunded liability actually jumps to about $1.8 trillion. So that’s how important that assumption is.”

Pennsylvania’s Public School Employees’ Retirement System has lowered its expected rate twice since 2008. The fund now assumes 7.5 percent, though it has earned nearly 9 percent over the last 25 years, according to spokeswoman Evelyn Tatkovski.

“It was determined that, in order to continue to structure the portfolio to earn that 8 percent, we’d have to take on a much higher level of investment risk,” she said.

The Pew study found that Pennsylvania’s fund “needs improvement,” labeled Delaware’s fund a “solid performer,” but expressed “serious concerns” about New Jersey’s.

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