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LAST SUMMER THE INDIANA Public Retirement System (INPRS) created a stir in the U.S. public defined benefit pension world by dropping its long-term investment return assumption to 6.75 percent a year, the lowest of all its peers. The move worsened the system’s funded ratio, meaning that future retirees may risk cutbacks in their pensions unless taxpayers inject more money into the system — no easy feat in these tough times. As unpalatable as those consequences are, Indiana pension officials decided they had to scale back their projections following years of historically low interest rates and the likelihood that those rates would continue to depress investment returns. Six months later not a single large U.S. public pension fund has followed Indiana’s example. Most still operate on the assumption that they can generate returns of    7 to 8 percent a year virtually in perpetuity.

Across the Atlantic a far more austere philosophy reigns. The Netherlands, which runs one of the world’s most rigorous and best-funded retirement systems, requires that pension plans discount their future liabilities using not their hoped-for rate of investment returns but a conservative benchmark tied to long-term interest rates. The standard is so strict that regulators, responding to pressure from pension funds, adjusted the benchmark in October, which raised the discount rate slightly, to 2.42 percent. Executives at Amsterdam-based ABP, the country’s largest pension fund, breathed a sigh of relief:  The move boosted their funded ratio modestly, to 97 percent. The executives can only imagine what it would be like to operate under U.S. rules — if they used Indiana’s discount rate, ABP could claim to be nearly 200 percent funded.

How can two otherwise similar pension funds use such radically different assumptions?    The $20 billion Indiana pension system and €261 billion ($348 billion) ABP, which oversees the retirement assets of Dutch public sector employees, both take in contributions, invest their portfolio and pay pensions to retirees. Yet when it comes to the all-important discount rate, the number used to calculate the present value of future pension payouts, the Indiana and Dutch pension systems part company.

U.S. public funds are free to select a rate that estimates the future returns of their investment portfolios, while the Dutch and most other European pension sponsors must by law use a rate pegged to standard market interest rates. The difference between those methods was relatively modest before the financial crisis, but it has widened dramatically as interest rates have plunged to historic lows in recent years. Today most European pension plans use a rate of     between 3 and 4 percent, with the Dutch being especially conservative, while U.S. public plans use a rate nearly twice as high, on average.