The board of trustees that oversees the Public Employees’ Retirement Association of Colorado (PERA) approved the revision during its annual review of the plan’s actuarial assumptions. Besides the investment return rate, the board also chose to lower the system’s long-term inflation expectations from 3.5% to 2.8%.
The move matches up with a wider trend in the public pension space of lower long-term investment expectations. In fact, a recent study from Milliman shows the median rate used by public defined benefit (DB) plans decreased from 8% in the 2012 version of the study to 7.75% in 2013.
A statement from the board points out that PERA, like other public pension systems, often sees annual returns in excess of its long-term expectations. In the current fiscal year, PERA has generated an about 11% return on plan assets. PERA’s return in 2012 was 12%, with the 10-year annualized return at 8.4% and the 30-year annualized return at 9.4%.
PERA retained the actuarial firm Cavanaugh Macdonald and investment consulting from Hewitt EnnisKnupp during its work to revise investment expectations. The board also heard from Buck Consultants, an actuarial firm retained for the purposes of providing an independent recommendation.
The fund, which serves about 300,000 teachers and state workers, has an estimated $23 billion in unfunded liabilities, according to recent reports from the Denver Post.
Walker Stapleton, Colorado state treasurer, estimated the system’s decision to lower return expectations means the pension fund’s unfunded liability will increase by about $6 billion.
More on PERA’s decision available at here.