Administration July 31, 2017

Maryland Pension System Further Reduces Return Assumption

State Treasurer Nancy K. Kopp says, “Recognizing that both the inflation experience and expectations for future inflation remain lower than the rate currently assumed, the Board felt it reasonable to reduce the expected return accordingly.”
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The Board of Trustees of the Maryland State Retirement and Pension System (MSRPS) has voted to reduce incrementally the system’s actuarial assumed rate of return on its investments over the next two years from 7.55% to 7.45%.

The Board will reevaluate the rate in two years to determine if additional reductions will be necessary.

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“The action taken by the Board is part of its overall strategy to increase the probability of achieving investment returns required to improve the health of the retirement System and meet its obligations to its members,” says State Treasurer Nancy K. Kopp, chair of the MSRPS Board of Trustees. “Recognizing that both the inflation experience and expectations for future inflation remain lower than the rate currently assumed, the Board felt it reasonable to reduce the expected return accordingly.”

Since 2008, at least 45 public pension plans have reduced their return assumptions, including the two largest public pension systems in the nation.

The National Association of State Retirement Administrators (NASRA) warns that public plans that reduce their return assumption in the face of diminished near-term projections will experience an immediate increase in unfunded liabilities and required costs. 

To develop its expectations for inflation, the MSRPS Board considered market pricing for inflation protected bonds, inflation projections provided by a range of investment consultants and the most recent forecasts of the Board of Trustees for the Social Security Administration insurance trust funds.

Before making this change, the Board revised its asset allocation policy to enhance the expected return of the system’s assets. Further, it considered the ongoing work of the system’s Investment Division to improve the net return by reducing fees and other expenses of the system and anticipated program changes to improve cost effectiveness through governance changes.

The Board last reduced the system’s assumed rate of return in 2013, when it decided to decrease it to 7.55% from 7.75% over a period of four years.

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