PERS board votes to continue assumed rate of return on investment earnings
For the first time in almost a decade, the board that oversees Oregon's public pension system has left unchanged the assumed rate of return on investment earnings for the next two years.
A 3-2 vote by the Public Employees Retirement System board on Friday, July 26, will continue the 7.2% rate into the 2021-23 state budget cycle.
Investment earnings on Oregon's public pension fund, which stood at $77.4 billion in May, account for about 75 percent of the money for pension payouts. The rest comes from fund contributions by member agencies and employees themselves.
The assumed rate of return also sets pension benefits for some government retirees if they were hired before 1996.
That rate had been 8% from 1989 until 2013, when the board reduced it to 7.75%, then to 7.5% in 2015, and to the current 7.2% in 2017. During three of the four years ending in 2017, the actual rate of return did not even reach the assumed rate.
"The glide path that this board has taken in the past six years is definitely a move in the right direction," said Sadhana Shenoy, the PERS board chairwoman for the past year and a former chief financial officer for a technology company.
"But I have decided that I will vote to keep it at 7.2%."
According to the National Association of State Retirement Administrators, which tracks 128 public pension systems, 75% have reduced their assumed rates in the past 10 years. The median — half are above, half below that figure — was 7.45% in 2018, compared with 8% back in 2010.
The board considered three projections.
Milliman, which is the actuarial consultant for PERS, pegged a 20-year rate at 6.87%. Milliman's Matt Larrabee and Scott Preppernau recommended a slight reduction from 7.2% to 7% or 7.1%, but no increase.
Callan, the consultant employed by the Oregon Investment Council — which oversees investments for Oregon's public pension and other state funds — projected a 7.32% rate for 10 years. Horizon, which compiles averages, projected a 6.64% for 10 years.
Vice chairman Lawrence Furnstahl, executive vice president and chief financial officer for Oregon Health & Science University, said he did his own averaging of rates over 20-year periods.
"It gave me a sense that we might not be too far out of the ballpark," he said, noting that low-return periods are followed by high returns, and vice versa.
"I'm inclined to keep us where we are now."
Board member Steve Demarest said the rate matters not only to member agencies — a reduced assumed rate of return on investment earnings means that governments must pay higher contribution rates — but also to retirees whose payments are linked to the rate.
"I understand there is a range of reasonable returns here," said Demarest, president of Local 503 of Service Employees International Union. "But I think overall, maintaining a 7.2% rate is the way to go."
Board members Stephen Buckley and Christelle Deasis had no great objection to leaving the assumed rate where it is, but they preferred a slightly reduced rate and voted in the minority.
"We are still within the guidelines by our advisers," Deasis said. "But I'm just feeling a little bit more conservative. It would be prudent to reduce the rate."
Board members Buckley, Deasis and Shenoy are not affiliated with member governments or employees covered by PERS.
The assumed rate is one part of the board's task in determining what will happen in the 2021-23 budget cycle and what member governments will pay into the system for the next two years.
On Dec. 6, the PERS board will get advisory rates for 2021-23 contributions by member governments, based on PERS valuation for 2018. The board will set the actual contribution rates in fall 2020, after PERS valuation for 2019 is determined at the end of this year.
Recent changes by the 2019 Legislature also will affect rates, which have been increasing even as the system faces an unfunded actuarial liability that was pegged at $22.3 billion at the end of 2017.
PERS now has more than twice as many active members in the post-August 2003 retirement plan (119,000) as in the previous two tiers (56,000). But of the 145,000 retirees, virtually all of them were hired before August 2003 and qualify for more generous pension benefits.
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