(Bloomberg) — Connecticut Treasurer Denise Nappier said the 0.35% return posted by the state’s $29 billion retirement system in the year that ended in June underscores the need to adopt more realistic investment assumptions.
The teachers’ and state employees’ funds, Connecticut’s two biggest pensions, target an 8% annual return. Such retirement plans are being forced to re-evaluate projected investment gains that determine how much money taxpayers need to put into them, given record-low bond yields, slow economic growth and declining stock prices.
“If return assumptions are set at levels unlikely to be attained, it will be difficult to achieve them without pursuing high risk-investment strategies,” Nappier said. “It is far more prudent to structure the portfolio based on what is achievable, rather than what is desirable.”
In an April 2016 report, McKinsey & Co. forecast that under a slow growth scenario, U.S. stocks will return 4% over the next 20 years while government bonds won’t make any money. Ten-year returns for Connecticut’s teachers’ and state employees’ pensions is 5.25% and 5.14%, respectively, far short of the annual gains it currently expects.
When pensions don’t meet their targets, taxpayers have to make up the difference. That won’t be easy in Connecticut, where a loss of high-paying jobs in financial services, population declines and mounting pension and health-care costs have forced the state to dip into its rainy day fund for the second-year in a row.
Connecticut’s pensions are among the worst-funded in the nation, with a combined unfunded liability of $26 billion, according to Boston College’s Center for Retirement Research. If Connecticut lowers its investment assumptions, that liability will grow.
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