OPERS Reduces Return Assumptions

Faced with declining market expectations, the Ohio Public Employees Retirement System (OPERS) Board of Trustees has lowered the pension system’s investment return assumptions for both the Defined Benefit Fund and Health Care Fund, Michael Pramik, with OPERS reported.

Beginning with the 2018 calendar year, the assumed actuarial rate of return will be 7.2% for the Defined Benefit fund and 6.0% for the Health Care Fund. The current rates are 7.5% and 6.5%, respectively.

OPERS said the move is expected to lower its funding level, but increase the time in which it can pay off liabilities.

This action reflects worsening expectations in the capital markets since OPERS’ last five-year experience study in 2016. Investment consultants have told OPERS to expect to earn half a percent less annually on investments than they forecasted during the experience study.

Further, the present value of OPERS’ future benefit payments to current retirees stands at $117 billion, and more than 60% of that liability is due to be paid within the next 15 years. “The rate of return adjustment is part of OPERS’ continuing effort to keep the pension plan healthy and sustainable. It determines how much money we need to have on hand now to pay future obligations,” Pramik said.

Pramik points out that many institutional investors have been lowering their earnings expectations. The median investment return assumption used by 129 public pension plans surveyed by the National Association of State Retirement Administrators (NASRA) was an all-time low 7.45% in July.

Last year, NASRA cautioned in an Issue Brief that, if near-term rates do prove to be lower than historic norms, plans that maintain their long-term return assumption are likely to experience a steady increase in unfunded pension liabilities and corresponding costs. Alternatively, plans that reduce their assumption in the face of diminished near-term projections will experience an immediate increase in unfunded liabilities and required costs. “As a rule of thumb, a 25 basis point reduction in the return assumption, such as from 8.0% to 7.75%, will increase the cost of a plan that has a COLA, by three percent of pay (such as from 10% to 13%), and a plan that does not have a COLA, by two percent of pay,” the Issue Brief stated.