Testimony to the PERS Board on Setting the Assumed Rate of Return
Here is my written testimony submitted to the PERS Board for their June 4, 2021 meeting.
Members of the PERS Board:
Some of you may recall I addressed the board in 2019 to offer input into your deliberations on setting the system’s assumed rate of return. I noted that the current assumed rate was far above what PERS investments had returned from its peak just before the 2008 financial crisis to the present. I urged you to continue reducing the assumed rate as had been done by previous boards over three rate-setting cycles before 2019, which you declined to do.
I further urged you to consider the actual long-term returns on PERS investments in your decision-making process and not rely solely on projections of future returns, which have been notoriously inaccurate.
I am back today to re-iterate these concepts, but with the added perspective gained from the latest information provided by Milliman in today’s board materials.
We now see that both Milliman and the advisor to the Oregon Investment Council have sharply lowered their projections. The OIC advisor has slashed its prediction by nearly 0.75 percent, down to 6.8 percent. And Milliman is all the way down to 6.27 percent, which is almost exactly what PERS investments have actually returned 2008-2020.
All the data before the board today, along with Milliman’s pointed recommendations, overwhelmingly call for a substantial reduction in the assumed rate.
I note two other factors that are present today that were not in 2019. When combined, they give the board an opportunity to do something truly historic.
First, PERS investments have had a fabulous two years, rising over $10 billion. This huge valuation is already showing in Milliman’s preliminary calculation of the uncollared base rate for employer contributions, which shows a rare reduction at the current assumed rate.
And second, 2021 revenue projections for Oregon call for a massive $1 billion in additional revenue, most of which will flow to the budgets of public employers.
These factors work together to provide an exceedingly rare opportunity for the board: slashing the assumed rate without causing a rate increase that employers would have difficulty absorbing.
Please do not miss this chance to bring the assumed rate into the realm of reality and greatly enhance the actuarial health of the PERS system.
Mr. Berg,
I just finished your response to Tim Knopp’s op-ed that was published in today’s Oregonian, and I wanted to thank you for such a clear, concise, and constructive response to a tired argument. Imagine my pride when I discovered that the author is from my home town:)
Please keep writing, and I’ll keep reading!
Thank you. There’s a lot going on right now with this huge surplus, even outside of the kicker. Hope you saw recent coverage of that in the Oregonian recently.
Douglas,
I am not an actuary but have had many decades exposure to them as TPA and CPA to many DB pension plans.
So we’ve had two fabulous years of high returns and the “ROA assumption” is lowered. Sounds more political than professional!
I can’t remember any plan with an assumed rate over 6%. Because to under achieve would increase the unfunded liability; which is what no responsible trustee should support.
I have knowledge of PERS but it seems the assumed rate has always been unreasonably high.
The rate should be set conservatively for all reasons and seasons, taking the actuarial gains and losses as they come. Not tweaking it upon market gyrations.
(My first participation in any blog)
FYI
Thank you for finding me!
By their nature, public retirement plans have been developed and modified with political considerations. Powerful public employees lobbies fight for higher benefits, often leaving the funding thereof to be figured out later.
In the case of Oregon PERS, public employees literally ran the plan back in the 1970’s and 1980’s. That’s when the worst of the benefit increases were enacted. Everyone thought the stock market was always going to have big returns. That’s when the assumed rate of return was adopted as a guaranteed rate of return, and a high one at that. And even for a few years, if the investments did better than the assumed rate, the difference was added to employees’ accounts rather being left in the fund. That’s when the actuarial liability took off like a rocket.
Then they started the tier system for employees. They started ending the big benefits by establishing new tiers for new hires. But the damage was done. Virtually all of the unfunded liability is now due to members in retirement.
Public employees or representatives of public employee unions now can only hold two seats on the five-person PERS Board. But they are all political appointees. The current chairperson has been there for about two years. Before her tenure, the chairman was John Thomas of Eugene. His board lowered the assumed rate of return three consecutive rate-setting cycles. That stopped with the new chairperson.
We’ll see what happens this year. PERS actuaries have stated that if the board doesn’t lower the assumed rate, they will almost certainly add a disclaimer to their report. Would not be a good thing.
Thanks for your feedback!
Thanks for your prompt reply Doug! I reread my comment and found couple of typos, the worst of which was I’ve had NO (omitted) experience with PERS.
When you have participants retiring relatively young the future liability can be gigantic. A friend is getting 300% of final compensation! ~$200K per year!
Two problems with building the liability is participating employers come and go through merger or dissolution and the funding burden falls on subsequent administrations because a promise was made by one group and paid by another, including next generation taxpayers.
I haven’t seen the Milliman actuarial report. Seems the FSAs have been MIA for a long time!