Iowa Public Pension Plan is the Latest Fund to Cut Expected Returns

City of Houston has proposed lowering firefighters’ pension fund’s 8.5 percent assumed investment return.


The Iowa Public Employees Retirement System’s Investment Board has voted to lower its assumed annual rate of return to 7 percent, from 7.5 percent, in the most recent rate cut by public pensions grappling with expectations that are set too high.

With the new assumed return and using data from 2016, IPERS’ funded ratio is now 80 percent, down from 84 percent, the pension system said March 24. Iowa Governor Terry Branstad said this week that he supports the move, including using increased contributions from workers and state and local governments to cover the additional $1.3 billion in unfunded liabilities.

The rate assumption is an important metric used to determine how much taxpayer money is set aside to pay future pension checks, with lower expected return rates often meaning higher contributions into the system from workers and governments. Several other pension systems have already lowered their expected investment returns over the past year, including the Illinois Teachers’ Retirement System and the California Public Employees’ Retirement System, while the Houston Firefighters’ Relief and Retirement Fund may be next.

“Too many states have overestimated the revenue in their pension funds, and as a result are in big trouble,” Branstad said Monday at the Iowa Capitol, as reported by The Des Moines Register. “We have seen what has happened with many cities. We have seen what has happened in the neighboring state of Illinois, and it has happened in many other states around the country.”

Most public pension plans in the U.S. have an assumed investment return between 7 percent and 7.5 percent as of February, according to the National Association of State Retirement Administrators. The Houston Firefighters’ Relief and Retirement Fund has the highest assumed rate of return at 8.5 percent, though this could be lowered to 7 percent as part of the City of Houston’s proposal to reform its pension plans. The proposed cut comes after the fund suffered net losses of 1.23 percent in fiscal 2016 and returns of just 1.29 percent in 2015. The rate cut will be considered by the Texas Legislature this year.

Illinois Teachers’ Retirement System cut its assumed rate of return to 7 percent, from 7.5 percent, in August 2016. ITRS is the largest of the state’s five state-run retirement systems, which are among the most underfunded in the country. Illinois’ pension debt jumped to $130 billion in 2016, up from $111 billion the year before, according to Illinois Policy, a nonprofit public policy institute in the state.

The California Public Employees’ Retirement System, the country’s largest public pension fund, followed suit in December, voting to lower its 7.5 percent rate in increments reaching 7 percent by 2020, after failing to reach the 7.5 percent target in the previous two years.