Treasurer Folwell Announces Lowering of Investment Return Assumption

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.