RALEIGH — State Treasurer Dale R. Folwell, CPA, announced
today the lowering of the investment return assumption for the North Carolina
Retirement Systems (the Fund) from 7.25% to 7.20% beginning with the December
31, 2016 valuations. The move was approved by the Teachers’ and State
Employees’ Retirement System (TSERS) and Local Government Employees’ Retirement
System (LGERS) Boards of Directors at their April 20th meeting.
The stability of the Fund relies on maintaining both
adequate employer and employee contributions and achieving long-term investment
goals. However, the Fund has not earned its assumed rate of return of 7.25% on
average for the last 15 years. For the calendar year ending December 31, 2016,
the Fund reported a return of 6.3%.
“The North Carolina General Assembly has fully funded the
state’s pension plans, putting them on a solid footing,” said Treasurer
Folwell. “However, because the projected rate-of-return has not been met, we
must begin taking gradual steps toward reflecting the actual historical rate.
Doing this will provide the best opportunity to meet the state’s long-term
obligations as well as maintain its AAA bond-rating. I want to thank the Boards
for making this decision.”
During a recent media availability, Treasurer Folwell referred
to the graph below illustrating bond-yields as compared to the pension plans’
assumed rate-of-return. Bond yields peaked in 1980 (as did inflation rates),
but have been steadily declining ever since. However, as Folwell pointed out,
the assumed rate-of-return has varied only slightly during that time-period.
“When interest rates were high, it was relatively easy to make your assumed rate by just investing in low-risk bonds,” added Folwell. “Since we have been in an essentially zero interest rate environment for the past 15 years, achieving that same rate in the future is unrealistic.”
Folwell also noted that, with this change, the percent at
which the Plans are funded, currently at around 95.9% for LGERS and 91.6% for
TSERS, will be lowered to 95.4% and 91.1% respectively. “This is not emotional
or political, but mathematical,” said Folwell. “It’s an historic change from
the Boards that more accurately reflects the real valuation of the Funds.”
Rate of Return
beginning for Teachers and State Employees’ Retirement System since 1958
The TSERS/LGERS boards have been granted the authority by
the legislature to set the actuarial assumed rate of return for the Fund.
The North Carolina Retirement Systems, the formal name for the pension fund, is
the 12th largest public pension fund in the country and is
currently valued at almost $90 billion. It provides retirement benefits and
savings for more than 950,000 North Carolinians, including teachers, state
employees, local governments, firefighters,
police officers and other public workers. For more information, visit www.nctreasurer.com.