Treasurer Folwell and Retirement Boards Refuse to "Kick the Can Down the Road" Pension Boards vote to lower investment return assumption to 7.0 percent

(Raleigh, N.C.) – North Carolina State Treasurer Dale R. Folwell, CPA, announced today that the investment return assumption for the North Carolina Retirement Systems (the Fund) will be lowered from 7.20 percent to 7.00 percent beginning with the December 31, 2017, valuations. First proposed 20 years ago, the move was unanimously approved by the Teachers' and State Employees' Retirement System (TSERS) and Local Government Employees' Retirement System (LGERS) Boards of Trustees (Boards) at their April 26, 2018, meeting.

“The North Carolina pension fund is one of the top five best funded in the country," said Treasurer Folwell. “However, we need to make realistic assumptions regarding our ability to achieve expected returns in the future. We owe it to the General Assembly, taxpayers, public employees and future generations to be transparent and realistic about the true valuation of the pension plans. Lowering this assumption 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."

The stability of the Fund relies on maintaining both adequate employer and employee contributions and achieving long-term investment goals. However, on average the Fund has not earned its assumed rate of return for the past 20 years. According to the 2016 Asset Allocation Study conducted by the Investment Management Division, the previous 7.25 percent (pre-2017) and 7.20 percent (adopted in 2017) investment return assumptions are somewhat greater than the median 20-year expected return, and close to (but greater than) the median 30-year expected return. According to the same study, the new assumption of 7.0 percent has a slightly greater than 50 percent probability of being achieved over the next 30 years.

The Boards' action comes as many states are lowering their expected assumed rate of return to better reflect realistic future investment gains. North Carolina's reduction to 7.00 percent will occur immediately with respect to the actuarial valuations as of December 31, 2017. However, the impact of the change on actuarially recommended employer contribution rates will be phased in over a three-year period. It is expected that some of these employer contribution rate increases would have occurred in any event under stabilization policies (ECRSPs) already adopted by the Boards in 2016.

The change will increase plan obligations by two to three percent (both funding and financial reporting) and will also generally translate into a reduction in the funded status of the affected systems by two to three percentage points.

Contributions to pension plans have three sources of funds: contributions made by employees, contributions made by employers (state agencies, school systems and local governments) and investment gains. When a retirement system lowers its expected investment gains, additional funding for the pension system must come from other sources like the General Assembly and local governments in the form of employer contributions.

Folwell praised the North Carolina League of Municipalities, North Carolina Association of County Commissioners, the Governor and the General Assembly for their support of the change. “Without their backing, we could not have made this change," said Folwell. “They should be given credit for realizing that we have to be more realistic about investment gains in order for the pension plan to remain solvent."

The North Carolina Retirement Systems, the formal name for the Fund, is the 9th largest public pension fund in the country and is currently valued at almost $100 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.myncretirement.com.