February 2, 2017 / 1:20 AM / 3 years ago

CalSTRS lowers expected return rate to 7 percent by 2018

Feb 1 (Reuters) - The California State Teachers’ Retirement System (CalSTRS) voted late Wednesday to lower its annual expected return rate from 7.5 percent to 7 percent by 2018.

The move was based on new lower assumptions for inflation and improving life expectancies of beneficiaries, which reduced the long-term probability to 50 percent that the pension fund would achieve its 7.5 percent return.

CalSTRS’s board agreed to immediately lower its forecast return to 7.25 percent, then lower it again to 7 percent in 2018.

Public pension funds across the country have been steadily revising downward their expectations for investment returns from a median discount rate of 8 percent in 2010 to 7.5 percent presently, according to the National Association of State Retirement Administrators.

CalSTRS’s sister fund, the California Public Employees’ Retirement System (CalPERS) in December lowered its expected rate of investment return by 2020 from 7.5 percent to 7 percent, citing lower market growth forecasts over the next decade.

In response to Wednesday’s decision, California Treasurer John Chiang said that “by creating a more fiscally stable system, we are keeping our promise to our teachers to safeguard their hard-earned benefits for years to come.”

Lower returns over time have a compounding effect, said Greg Mennis, director of the Pew Charitable Trusts’ public sector retirement systems. “It means states and cities are going to be putting more money into the pension system.”

Under the new 7 percent return expectation, the cost of the plan for the state will likely increase by 0.5 percent of payroll each year for at least the next decade, according to an actuarial study released by CalSTRS last week.

For employees hired under the Public Employees’ Pension Reform Act of 2013, commonly known as PEPRA, employees’ contributions will likely increase from 9.2 percent to 10.2 percent of salary.

Some members of CalSTRS board, however, warned that the fund may further lower expectations in the coming years, especially if investment returns fall short.

“I have an instinct that the 7 percent is going to be too high,” said Tom Unterman, a member of the CalSTRS board. (Reporting by Robin Respaut, editing by G Crosse)

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