U.S. Pension Funds Have Lowered Expectations

January 29, 2009 (PLANSPONSOR.com) - U.S. pension funds are projecting sharply reduced investment returns from major asset classes through 2013, according to new research from Greenwich Associates.

A Greenwich press release said overall, corporate pension funds interviewed from July to October 2008 indicated they had reduced investment returns on plan assets to 7.4% annually in 2008 from 8.2% in 2007, and public funds cut overall portfolio return expectations to 7.6% from 8.5%.

Pension funds have dramatically reduced return expectations for U.S. equities, with projections for annual rates of return dropping to 7.8% in 2008 from 8.6% in 2007 among corporate plans, and to 7.9% from 9.1% among public plans.

Both groups also cut return expectations on fixed income, with public plans reducing annual expectations to 5% from 5.8% and corporate plans reducing expected returns to 5.2% from 5.6%, the press release said. Pension funds also reported substantial reductions in expected returns on international equity, equity real estate, private equity, and hedge funds.

However, private equity is expected to generate the highest returns of any asset class over the next five years, with public funds projecting an annual 11.3% return from their private equity investments and corporate funds expecting 10.1%.

Greenwich also found declines in investment returns have produced a gap between pension funds’ actuarial earnings rate and their actual expectations for returns on plan assets. The average actuarial earnings rate reported by corporate pension plans increased modestly to 8.3% in 2008 from 8.2% in 2007 despite the decline in expected returns for all asset classes – resulting in an expected gap of 90 basis points.

Although the average actuarial rate for public plans declined to 8% in 2008 from 8.2%, the bigger drop in expected investment returns has produced a gap of 40 basis points.