NHRS Trustees Reduce Assumed Rate of Return

Rate change is part of several adjustments to actuarial assumptions

Jun 09, 2020
  • Board of Trustees

For Immediate Release: June 9, 2020
Contact: Marty Karlon, Public Information Officer, (603) 410-3594; [email protected] 

CONCORD – The Board of Trustees of the New Hampshire Retirement System (NHRS, the retirement system) voted June 9, 2020, to adopt revised actuarial assumptions based on the results of a four-year experience study conducted by its consulting actuary. In an accompanying vote, the Board voted to reduce the retirement system’s investment assumption, lowering the assumed rate of return from 7.25 percent to 6.75 percent.

The new assumptions, which better reflect the retirement system’s actual and anticipated experience, will be used in the actuarial valuation for the fiscal year ending June 30, 2019. By statute, this valuation will be used by the Board in September to determine employer contribution rates for fiscal years 2022 and 2023. Overall, the changes to actuarial assumptions approved this year are expected to increase in 2022-23 employer contribution rates; current retiree pension benefits and benefit formulas for active members are unaffected.

 “The Trustees have a legal obligation as fiduciaries to adopt actuarially reasonable assumptions, including the assumed rate of return. The decision to adopt these assumptions is consistent with the Board’s duty to act in the best interests of the retirement system’s members and beneficiaries,” said NHRS Executive Director George P. Lagos. “In taking this action, the Board is responding responsibly to capital market projections, anticipated continued low, long-term interest rates, and other economic and demographic data points that are key to projecting the pension system’s liabilities.”

The Board’s decision to conduct an experience study, which was recommended by GRS Consulting (GRS), the retirement system’s independent actuary, was made in December 2019. Lagos noted that “This study is based upon actuarial experience for the period July 1, 2015, to June 30, 2019, and does not take into consideration any market volatility or potential economic impact related to the coronavirus (COVID-19) pandemic.”

Actuaries conduct experience studies on a regular basis to assess the extent to which their assumptions reflect plan experience. New Hampshire law requires the retirement system’s actuary to conduct an experience study at least once every five years.

GRS calculates NHRS’ funded ratio, unfunded actuarial accrued liability (UAAL), and employer contribution rates based on assumptions about many future events, such as the age when members will retire, their rate of salary growth, how long they will live after retirement, and how much the plan’s investments will earn. These assumptions are based on detailed statistical models in accordance with national Actuarial Standards of Practice. However, they are not facts; no one can predict future events. When the assumptions don’t match the actual experience, there can be an actuarial gain or loss. Put simply, gains reduce employer contribution rates, losses increase employer contribution rates. 

The New Hampshire Constitution (Part I, Article 36-a) requires NHRS Trustees to set actuarially sound employer contribution rates and requires employers to annually pay those rates in full. Employer rates are calculated every two years to reflect the cost of benefits as they accrue as well as pay down existing unfunded liabilities. The retirement system’s unfunded liability is the difference between current assets and the value of benefits already accrued. This unfunded liability – most of which is being paid off through 2039 – accounts for more than two-thirds of current employer rates. Any increase in liabilities resulting from revisions to actuarial assumptions included in the FY 2019 actuarial valuation will be amortized over a 20-year period ending in 2041.

Of all the assumptions used to estimate the cost of a public pension plan, none has a larger effect on the plan’s employer contribution rates than the investment return assumption. This is because, over time, earnings from investments account for a majority of the retirement system’s revenues.

In considering the assumed rate of return, NHRS Trustees heard capital market presentations from several independent, expert sources, including NEPC, the retirement system’s investment consultant. GRS, in its role as consulting actuary, opined that an assumed rate of return within the range of 6.25 percent to 7.0 percent would be considered as actuarially reasonable.

The last time the assumed rate of return was changed was May 2016, when it was reduced from 7.75 percent to 7.25 percent.

According to February 2020 data compiled by the National Association of State Retirement Administrators (NASRA) in its review of the nation’s largest public pension funds, the average assumed rate of return as of February 2020 was 7.22 percent. Among the 130 plans measured, 91, or 70 percent, have reduced their assumed rate of return since fiscal year 2017. At that time, 15 public pension plans had an assumed rate of return of 6.75 percent or lower.

The 6.75 percent rate represents what NHRS Trustees believe the plan can realistically earn from its investments on an annual basis, when averaged over the long-term. In any given year, investment returns are likely to be higher or lower than the long-term assumed rate.

About NHRS

NHRS provides retirement, disability, and death benefits to its eligible members and their beneficiaries. The State of New Hampshire and more than 460 local government employers participate in NHRS for their employees, teachers, firefighters, and police officers. NHRS has approximately 48,000 active members and 38,000 benefit recipients. NHRS administers a defined benefit plan qualified as a tax-exempt entity under sections 401(a) and 501(a) of the Internal Revenue Code. 

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