The average investment return rate assumption for U.S. public pension funds has fallen below 7.0%, to its lowest level in more than 40 years, according to the National Association of State Retirement Administrators.

Among the 131 funds that NASRA measured, more than half have reduced their investment return assumption since fiscal year 2020 as rising interest rates and other factors have contributed to more volatile investment returns.

For the 30‐year period that ended in 2020, public pension funds accrued approximately $8.5 trillion in revenue, according to NASRA, of which $5.1 trillion, or 60%, came from investment earnings. Employer contributions accounted for $2.4 trillion, or 28%, and employee contributions totaled $1 trillion, or 12%.

“The large portion of revenues from investment earnings reflect the important role they play in funding public pension benefits,” says a NASRA brief on the subject.

NASRA’s report also notes that a challenging aspect of setting the investment return assumption that has emerged recently is a divergence between expected returns over the next five to 10 years and expected returns over the next 20 to 30 years. Because many near‐term projections calculated recently are well below the long‐term assumption that most plans are using, according to NASRA, some pension funds face the choice of either maintaining a return assumption that is higher than near‐term expectations or lowering their return assumption to reflect near‐term expectations.

“If actual investment returns in the near‐term prove to be lower than historic norms, plans that maintain their long‐term return assumption risk experiencing a steady increase in unfunded pension liabilities and corresponding costs,” says the NASRA brief. “Alternatively, plans that reduce their assumption in the face of diminished near‐term projections will experience an immediate increase in unfunded liabilities and required costs.”

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