Consultant recommends teacher pension system lower investment expectation
SPRINGFIELD -- State government’s largest pension system is evaluating whether to lower the rate of return it expects to get on its investments, a step that could significantly increase the state’s pension payment shortfall.
An actuarial firm employed by the Teachers’ Retirement System recommended to the TRS board of trustees that the rate of return be lowered, the TRS said in a statement Thursday.
The system now assumes its investments will earn 8.5 percent annually. Investment income is one of the revenue sources used to pay pension costs, along with contributions from educators and money paid by the state.
The actuary recommended that TRS consider options ranging from 8.25 percent to as low as 7.75 percent.
Lowering the expected rate of return will result in higher payments by the state into the system and also cause TRS’s unfunded liability to increase. TRS released numbers showing one change could cost the state an additional $600 million in the next budget year.
The TRS board decided last week to postpone its rate of return decision until September.
“This is one of the most important decisions the board will make,” TRS executive director Dick Ingram said in the statement. “Our members and the board should have the benefit of other opinions and analysis before making a key decision that affects the next five years.”
TRS’s actuary, Buck Consultants, recommended a number of changes to actuarial data used by the system to determine benefit costs, including assumptions about mortality, salaries of TRS members, retirement age and length of retirement. For example, if salaries don’t increase as much, pension costs will be lower.
The estimated rate of return, however, is crucial.
“Buck is not confident that 8.5 percent can be sustained as much as we need it to be sustained,” said TRS spokesman Dave Urbanek. “To them, it’s better to have something that is more achievable.”
The state will pay $2.9 billion into the TRS system in the current fiscal year. Buck estimates that will increase to $3.5 billion next year if TRS adopts all of its recommendations, but continues to assume an 8.5 percent rate of return.
However, if TRS lowers the expected rate of return to 8.25 percent, the state will have to pay an estimated $3.7 billion. If TRS cuts the rate to 7.75 percent, the state payment would be an estimated $4.1 billion.
“It’s up to the board as to what they feel comfortable with,” Urbanek said. “They have to set a realistic rate. What the board wants to do is hear from staff, hear from our investment consultants.”
The board could also decide to leave the estimated rate of return at 8.5 percent.
Ingram told the Wall Street Journal in June that he expected the board to lower the projected rate of return.
TRS is required to review its rate of return estimate at least every five years. The board first set the 8.5 percent rate in 1997. Between 1981 and 2011, TRS averaged a 9.3 percent rate of return on its investments. However, the system’s investments fell after the 2001 terrorist attacks and again after the financial collapse.
A survey by the National Association of State Retirement Administrators released earlier this summer showed few public retirement systems now expect 8.5 percent returns. The average was 7.73 percent.
Doug Finke can be reached at (217) 788-1527.