How Has the Decline in Assumed Returns Affected Plan Costs?

SLP#66

The brief’s key findings are:

  • Public pension plans have lowered their investment return assumptions, which generally raises costs by requiring larger contributions to fund promised benefits.
  • However, the decline in assumed returns is due to lower expected inflation, which should have no effect on costs in an inflation-indexed system.
  • At the same time, plans have increased their assumed real (i.e., net of inflation) investment returns, which lowers costs.
  • Thus, plans could have lowered costs with these two assumption changes.
  • But, public plans are not fully indexed so their real costs actually increase as the inflation assumption falls.
  • The net effect of these changes has been to increase costs, but the increase is much smaller than if the decline in the assumed return was due to a lower real return.