The action was taken following a recent review of its asset liability model and revised capital market assumptions. “The assumed rate of return greatly influences the financial future of TRS. Reducing the rate from 8% to 7.5% is a prudent move that balances expected future reality with the needs of TRS members,” says Executive Director Dick Ingram. “The Board’s decision takes into consideration extensive input from our actuaries and investment consultants. It is one of the most important elements of the fiduciary duty we have to keep the System as strong as possible.”
The former 8% rate of return, adopted by the TRS Board in 2012, has proven to be appropriate. The actual long-term TRS investment rate of return currently exceeds 9%. Back in 2012, the Board voted to revisit the long-term assumed rate of return every three years in the future instead of the customary five years. Trustees said the change was prompted by increasing volatility in the international economy.
The National Association of State Retirement Administrators (NASRA) reported earlier this year that of 126 major state and municipal pension systems across the country, 32 had set an assumed rate of return between 7.5% and 8%; 37 had set a rate between 7% and 7.5%; and 45 had an 8% rate (see “Indiana Pension Drops Return Assumption to 6.75%”). The average return rate of the 126 systems is 7.72%. The NASRA study also found that over the last 25 years, the 126 pension systems recorded a median actual investment return of 9%.
In other business, the Illinois TRS increased its long-term asset allocation targets for private equity and real estate investments (from 12% and 14% in 2011 to 14% and 15%, respectively) and decreased its long-term assets allocation targets for domestic and international equity (from 20% each in 2011 to 18% each). The system also moved its target for real return assets from 10% to 11%. The targets are designed to minimize investment risk and maximize returns, the system says.