NHRS Trustees Lower Assumed Rate of Return

Rate change is part of several adjustments to actuarial assumptions

May 10, 2016
  • Board of Trustees

For Immediate Release: May 10, 2016
Contact: Marty Karlon, Public Information Officer, (603) 410-3594; public_relations@nhrs.org

CONCORD, NH – The Board of Trustees of the New Hampshire Retirement System (NHRS, the retirement system) voted May 10, 2016, to adopt revised actuarial assumptions based on the results of a five-year experience study conducted by its consulting actuary. In a related vote, the Board voted to reduce the retirement system’s investment assumption, lowering the assumed rate of return from 7.75 percent to 7.25 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, 2015. By statute, this valuation will be used this fall to set employer contribution rates for fiscal years 2018 and 2019.

“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. “Over the past several months, the Board has been reviewing the experience study and receiving input on the long-term economic outlook from a variety of investment professionals.”

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 every five years.

Gabriel Roeder Smith & Co. (GRS), the retirement system’s consulting actuary, 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’ll live after retirement, and how much the plan’s investments will earn. These assumptions are based on detailed statistical models and adhere to 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. Overall, the changes to actuarial assumptions approved at the May Board meeting are expected to increase 2018-19 employer contribution rates in the aggregate.

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 – which is being paid off through 2039 – accounts for more than two-thirds of current employer rates.

 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, recommended that Trustees adopt an assumed rate of return within the range of 7 percent to 7.5 percent.

The last time the assumed rate of return was changed was May 2011, when it was lowered from 8.5 percent to 7.75 percent.

According to the most recent data compiled by the National Association of State Retirement Administrators (NASRA) in its survey of the nation’s top 127 public pension funds, the average assumed rate of return as of December 31, 2015, is 7.62 percent. Overall, 21 public pension plans have an assumed rate of return of 7.25 percent or lower.

The 7.25 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.

The retirement system’s one-year, three-year, five-year, 10-year, and 20-year investment returns for the periods ended June 30, 2015, were  3.5 percent, 11.7 percent, 11.6 percent, 6.9 percent, and 7.8 percent, respectively.  Compared to the members in the InvestorForce Public Defined Benefit Universe, which represents 242 public plans totaling more than $435 billion in assets, NHRS performed better than 70 percent of its peers over the one-year period and better than 90 percent its peers over the three- and five-year periods. All returns are net of fees.

Related links

NHRS Now You Know, “Looking back to move forward”: 

NHRS Now You Know, “Fiduciary: A word worth knowing”: 

About NHRS

NHRS provides retirement, disability, and death benefits to its eligible members and their beneficiaries.  The State of New Hampshire and nearly 470 local government employers participate in NHRS for their employees, teachers, firefighters, and police officers.  NHRS has approximately 48,000 active members and 31,000 pension 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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