Long-term Public Pension Plan Returns Beat Assumptions

March 16, 2010 (PLANSPONSOR.com) – A recent review of empirical data by the National Association of State Retirement Administrators (NASRA) finds that since 1985 - a period that has included three economic recessions and four years when median public pension fund investment returns were negative - public pension funds have exceeded their assumed rates of investment return.

The NASRA Issue Brief, Public Pension Plan Investment Return Assumptions, prepared by research director Keith Brainard points out that median public pension actual investment returns for the 25-year period ended December 31, 2009, was 9.25%, which exceeded the median assumed return rate of 8%. The report emphasizes the long-term focus of the governmental plan investment return assumption, the process by which it is calculated, as well as the public policies surrounding its regular review.        

“A short-term look at investment returns can be misleading as returns can fluctuate dramatically over brief periods of time. For example, public plans have had a one-year investment return of nearly 20% and a 3-year return below negative one percent,” said Brainard, according to a press release.      

Brainard points out that of all the assumptions used to estimate the cost of a public pension plan, none has a larger impact on the plan’s costs than the investment return assumption because over time, earnings from investments account for a majority of revenues for most public pension plans.     

The brief also identifies many of the factors that actuaries and plan fiduciaries must consider when establishing and evaluating the investment return assumption, such as:

  • current yields on government and corporate bonds;
  • expected rates of inflation and returns for each asset class;
  • historical investment data;
  • the plan’s historical investment performance;
  • the plan’s investment policy – asset allocation, risk tolerance, target allocations, etc.;
  • expected volatility of the portfolio;
  • performance of managers investing the assets;
  • investment expenses; and
  • projected timing and volatility of cash flows.


NASRA said the brief is not a defense of a particular investment return assumption rate, but rather is intended to clarify how this assumption is established, how it should be evaluated, and to compare actual results with assumptions used by public pensions.      

The brief is here.