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Expected Rate of Return Assumptions Remain a Concern for 2017

Some high profile pension funds have reduced their asset portfolio expected return assumptions to be used for actuarial valuation. For example, CalPERS announced in December 2016 that they reduced their assumed rate of return to 7.0% from 7.5%, which will be phased in over a 3 year time period. According to a CalPERS spokesperson, the move was to align assumptions to be “more reflective of the financial returns they can expect in the future.” Low global growth assumptions have continued to weigh on expected returns, and many investment managers have continued to lower their expected asset class return assumptions to the point that a typical, diversified 60/40 investment portfolio is expected to barely yield 6% over the medium to long-term horizon. Separately, in a survey conducted in the 4th quarter, the National Conference of Public Employee Retirement Systems (NCPERS) found that, on average, public plans are using an assumed rate of return of 7.5%. However, about 40% of the plans did reduce their assumptions in 2016, and 30% of the plans stated they were contemplating a further reduction in their assumptions.