Connecticut pension report to advise trimming return outlook

Reuters News
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Posted: Nov 06, 2015 7:36 PM

By Edward Krudy

(Reuters) - A report expected next week on reforming Connecticut's state employee public pension system will recommend cutting the annual expected rate of return by 1 percentage point to 7 percent, a lead researcher told Reuters on Friday.

The lower return forecast means the state may have to contribute more money to the pension system. The report was commissioned by Connecticut's Office of Policy and Management (OPM) and prepared by analysts at the Center for Retirement Research (CRR) at Boston College.

"Poor returns over this past decade just really put a lot of pressure and strain on the system," said Jean-Pierre Aubry, associate director for state and local research at CRR, who worked on the report, which could be released as soon as Tuesday.

Connecticut's pension has $10.5 billion in assets and returned just 2.8 percent in the last fiscal year ended June. Connecticut's pension system is one of the worst funded in the country with just 48 percent of assets needed to meet liabilities, according to a Pew Charitable Trust report earlier this year.

Cutting the expected yearly return from its current 8 percent to 7 percent would be a large adjustment for a public pension fund to adopt in one move.

Connecticut's teachers' retirement plan, which has $16.2 billion in assets, will cut its expected return to 8 percent from 8.5 percent, the state treasurer said this week.

Connecticut would join the two-thirds of the nearly 130 largest public U.S. pension plans that have cut expected rates of return since the financial crisis in 2008. A study by the National Association of Retirement Administrators found the discount rate among those funds had come down from 8 percent in 2008 to 7.68 percent currently.

Democratic Governor Daniel Malloy referred to elements of the plan in a presentation last week that focused on shoring up the state's finances and making its underperforming economy more competitive. He did not mention the 7 percent figure.

The most radical proposal that Malloy outlined is to split the pensions system, creating a closed pay-as-you go plan for existing retirees that would eventually run down over the next 30 to 40 years. The other plan would be a going concern that would be almost fully funded.

"What they are trying to do is take that unfunded liability that is essentially the product of the years of under-funding and spread it over many, many generations," said Aubry.

Separating liabilities and lowering the expected rate of return is a recognition that the current trajectory may not be sustainable.

Neither the OPM nor Malloy's office returned a request for comment.

The governor's presentation shows state contributions to the pension system remaining steady at around $2 billion a year through at least 2044 instead of possibly ballooning to over $6 billion, or nearly a third of the budget, by 2032.

(Reporting by Edward Krudy in New York; Editing by Daniel Bases and Lisa Shumaker)