Update: TRS Reduces Assumed Rate of Investment Return

September 21, 2012

The State’s largest retirement system voted on September 21, 2012 to reduce its assumed rate of return on investment, a decision that will increase the annual State contribution required by law beginning in FY2014.

The Board of Trustees of the Teachers’ Retirement System (TRS) voted 11 to 2 to reduce the assumed rate of return to 8% from 8.5%, according to a news release. As discussed here, a consultant recommended in August 2012 that TRS lower the rate to either 8.25%, 8% or 7.75%. According to the news release, TRS believes that the new rate is realistic and fairly distributes the cost of benefits among several generations of taxpayers.

The change, combined with other approved revisions in actuarial assumptions, will increase the statutorily required State contribution to TRS in FY2014 to $3.37 billion from $3.07 billion. The system’s unfunded liability (liability not covered by assets) as of June 30, 2011 increases to $89.1 billion from $83.5 billion, and its funded ratio (share of liability covered by assets) declines from 45.2% to 42.4%.

The consultant’s recommendations were included in an actuarial experience review required every five years for each retirement system by the Illinois Pension Code. Following similar reviews, the State’s other four pension systems previously lowered their assumed rates of return to between 7.0% and 7.75%. TRS plans to reconsider its actuarial assumptions, including the assumed rate of return in three years instead of five due to the volatility of the world economy.