HOUSTON (April 7, 2017) – A new report from the Texas Association of Public Employee Retirement Systems shows that local pension funds have in the aggregate lowered their assumed rates of return over the last six years. Combined with TEXPERS’ observations of improved pay-off period trends, the association asserts that Texas pension systems are achieving larger stewardship goals for employees and taxpayers.
The assumed rate of return is a target which pension funds set for investments. The target can affect how much is needed in contributions from public employees and their city sponsor to achieve benefit levels agreed to in their employment contracts. Higher targets reduce the required contribution but may set unrealistic expectations which cannot be attained and must be paid later. The higher targets might also increase risk in more aggressive investments. Lowering targets may require larger payments from a city’s annual budget and employees but can also reduce investment risks. The challenge is finding an assumed rate agreeable to a city, employees, and the pension fund, with risk tolerances and budget realities in mind.
TEXPERS’ report is based on a survey which shows that 61 of 78 pension funds targeted investment returns below eight percent in 2016. That compares with a 2011 TEXPERS survey when 19 of 52 systems had assumed rates below 8 percent. Some experts believe lower expected return rates reflect reality in the current investment environment given low interest rates on fixed income assets.
“We continue to hear criticism that pension funds set unrealistic rates of return and take unnecessary risk in the low interest rate environment we’ve had the last 10 years,” said Max Patterson, executive director of TEXPERS. “The facts indicate that not only are pension systems reducing their expectations but also managing benefits levels and investments in a responsible manner. These facts directly contradict what opponents to defined benefit plans say about target rates and the sustainability of the pension systems.”
Patterson said his statement should be put in context with another TEXPERS study which confirmed a 6-year trend of local systems achieving lower amortization periods. The ‘am period’ is a concept similar to a pay-off amount for a mortgage: it calculates the years needed to pay off all present and future projected benefits to employees. The Texas Pension Review Board says that amortization periods are the single “most appropriate” measure of public retirement systems’ health.
The two reports, complete with graphics, may be found at http://www.texpers.org/am_period_jan_2017 and http://www.texpers.org/2017-target-rate-report.
The Texas Association of Public Employee Retirement Systems (TEXPERS) is a statewide voluntary nonprofit association which provides quality education to trustees, administrators, professional service providers and employee groups and associations engaged or interested in the management of public employee retirement systems.
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