North Carolina Lowers Assumed Rate of Return for State Pensions to 6.5%

Investment rate cut is the third made by the state in the past four years.


The $116 billion North Carolina Retirement Systems has lowered its assumed rate of investment return for the third time in four years, cutting it by 50 basis points (bps) to 6.5% from 7% annually.

The target return had already been reduced to 7.2% from 7.25% in 2017 and again in 2018 to 7%. Prior to then, the rates had been left unchanged for nearly six decades even though the two main state pension funds—the Teachers’ and State Employees’ Retirement System and the Local Government Employees’ Retirement System—have, on average, underperformed their assumed rates of return over the past 20 years. In fact, the new target rate of 6.5% is still higher than the fund’s estimated 20-year return of 6.28%.

“The North Carolina pension fund is one of the best funded in the country; however, we need to make realistic assumptions regarding our ability to achieve expected returns in the future,” North Carolina State Treasurer Dale Folwell said in a statement. “Lowering this assumption will provide the best opportunity to meet the state’s long-term obligations as well as maintain its AAA bond rating.”

According to the National Conference on Public Employee Retirement Systems (NCPERS), the average assumed rate of return for the public pension funds it surveyed was 7.26% last year. And according to the National Association of State Retirement Administrators (NASRA) the median investment return assumption is 7.23%—the lowest level in more than 40 years.

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When a retirement system lowers its expected investment gains, any additional funding has to come from other sources, such as a state’s general assembly or local governments in the form of employer and employee contributions.

Folwell’s office said that if the 6.5% assumed rate of annual return is achieved, the actuarially required contributions to fund promised benefits should remain at their current levels in the coming years. However, it also said that funding policies may call for additional contributions beyond actuarially required amounts to ensure long-term budget stability.

The move was made as part of a slate of recommendations from Cavanaugh Macdonald Consulting, the fund’s actuarial consultant, which conducts a study at least once every five years that reviews the differences between the plan’s assumed and actual investment returns.

Cavanaugh Macdonald said its reason for reducing the assumed rate of return was based mainly on the fact that it believed the previous assumption of a 3% rate of annual inflation should be reduced by at least 50 basis points. The firm recommended that the total investment return assumption be set at 2.5% for inflation plus 4% for investment returns exceeding inflation, for a total of 6.5% per year.

The changes were unanimously approved by the boards of trustees of the Teachers’ and State Employees’ Retirement System and Local Government Employees’ Retirement System. The North Carolina Department of the State Treasurer said the change will be recognized immediately for financial reporting and calculating the funded percentage level. However, the effect will be phased in over a period of five years in order to determine employer contribution rates.

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Public Pensions Increasingly Rely on Investment Earnings

NCPERS study finds public retirement systems derive 71% of revenue from investment returns.


Public pension funds derived 71% of their revenue from their investment earnings last year, up from 69% in both 2019 and 2018, according to an annual study from the National Conference on Public Employee Retirement Systems (NCPERS).

Employer and employee contributions made up the rest of the revenue, accounting for 20% and 9%, respectively. The share of revenue from employer contributions declined from 22% in 2019, while the share of revenue from employee contributions remained unchanged.

The study was based on responses from 138 state and local pension systems that have approximately 12.8 million active and retired members, and assets of more than $1.5 trillion in actuarial and market value. Among the responses, 51% were from statewide pension systems, while 49% were from local pension systems.

The funds reported one-year and 10-year returns above their assumed rate of return, while the five-year and 20-year returns were slightly below their target. The average one-year return for the funds was 8.1%, while the average five-, 10-, and 20-year investment returns were 6.8%, 8.7%, and 6.3%, respectively. The average funded level rose to 75.1% from 72.4% in 2019.

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The average assumed rate of return for responding funds was 7.26% in 2020, up from 7.24% the previous year. Overall, 52% of responding funds said they lowered their assumed rate of return, with 17% saying they are considering doing the same.

In 2019, the funds’ average one-year return was 4.5%, while the five-, 10-, and 20-year average returns were 7.1%, 7.7%, and 11.2%, respectively.  The sharp decline in 20-year returns from 11.2% to 6.3% during the year was attributed to the strong performance of the late 1990s rolling off the average.

Among the retirement systems that offered cost-of-living adjustments (COLAs) to members, the average adjustment in the most recent fiscal year was 1.7%, up slightly from a year earlier. However, the report noted that many of the funds that responded did not offer a COLA in the most recent fiscal year.

And the overall average expense to administer the funds and to pay investment management fees for all respondents was 60 basis points (bps), or 0.6%, up from 0.55% in the 2019.

The report also found that the COVID-19 pandemic—not surprisingly—had a significant impact on the adoption of communication capabilities, as the ability of board members to participate and vote by phone or videoconference rose to 58% from 19%. Approximately 54% of funds now offer live web conferences to members, with another 19% considering it.

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