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PA public pension fund lowers expectations

By   /   May 3, 2012  /   3 Comments

Adds an estimated $2B to costs
By Eric Boehm | PA Independent
HARRISBURG — One of Pennsylvania’s two major public pension systems voted this week to lower its long-term assumed rate of return, adding about $2 billion to the fund’s unfunded liability.

The State Employees Retirement System said in a statement that the board decided to lower the expectation after months of discussion on current market conditions and reasonable expectations for the next 20 to 30 years.
“The board concluded that 7.5 percent is a reasonable long-term return assumption for this fund at this time,” said Nicholas Maiale, SERS board chairman. “We will revisit the rate each year and adjust if appropriate.”
Maiale told the House Appropriations Committee in March the fund was considering the adjustment, after the Public School Employees Retirement System lowered its expectation from 8 percent to 7.5 percent last year.
Lower expected rates of return affect the way the funds’ unfunded liability is calculated — a higher assumed return means a lower unfunded liability. But failing to meet that annual rate of return means higher costs for taxpayers because contributions from the state budget fill in any shortfall in investment returns.
Decreasing the assumed rate from 8 percent to 7.5 percent would change SERS' funded ratio from 68.8 percent to 65.3 percent, said Pamela Hile, SERS spokeswoman.
Official numbers will be available when SERS releases its annual report in June, but the change is expected to increase the unfunded liability by about $2 billion. As of December, SERS reported an unfunded liability of $10 billion.
But even the lowered expectations may be too high, according to a recent report from Wilshire Associates, a national investment advisory firm. The report suggested that state pension systems should use an annual rate of return of 6.5 percent to meet long-term obligations.