More Texas pension funds have moved to reduce their assumed rate of investment returns in the past six years, according to the Texas Association of Public Employee Retirement Systems (TEXPERS), thereby improving their health. In 2011, 19 of 52 Texas pension fund systems, or about 36%, reported an assumed rate of return of 8% or lower. In 2016, 61 of 78 pension fund systems, or 78%, reported the same. TEXPERS conducts an annual survey of its more than 80 members.
Combined with a six-year trend to improved amortization periods for Texas pension systems, TEXPERS expects that the move to lower target rates of return puts the Texas pension systems in better health. While a higher target rate for investments would understate pension systems’ liabilities and call for a lower contribution from public employees and their employers to pay out promised pension benefits, the targeted returns could be unrealistic and goals may not be met. Higher return targets could also force the pension plans to take on more risk.
And though setting a lower target rate of return could help cut risk, it also will overstate the plan’s liabilities and will likely mean larger contributions from the employers and workers. The ideal target rate is one that employers, employees and pension funds find amenable, keeping in mind budget realities and risk tolerances.
“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,” noted 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.”
Politically, those who are against defined benefit plans believe that pension plans that have set their assumed rates of return at higher than 8% hide the extent to which they are underfunded, and also cause the system to take on too much risk. There are those who argue that lowering the assumed rate of return to reveal the extent of a system’s pension underfunding would cause it to opt for defined contribution plans instead of defined benefit plans.
According to TEXPERS, these are not valid arguments, given that Texas pension systems have been lowering their target rates of return, based on expectations for lower investment returns. Even with these lowered returns, the improvements in their amortization periods mean that there hasn’t been a negative impact on their ability to meet their obligations.