Texas Teachers drops return rate 75 basis points to 7.25%

Texas Teacher Retirement System, Austin, lowered the assumed rate of return for the $151.3 billion defined benefit plan to 7.25% from 8% at a board meeting Friday.

The vote by the fund’s board was 5-4. The measure also includes a decrease in the inflation assumption to 2.3% from 2.5%, a webcast of the meeting showed.

The proposal was drafted by the fund’s actuary, Joseph Newton, pension practice leader at Gabriel, Roeder, Smith & Co., and was based on an experience study.

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In preparing the study, TRS and GRS sought input from the board’s consultant, Aon Hewitt Investment Consulting, other large pension funds and investment managers about market forecasts over the next 10 to 20 years.

Aon’s expected annualized rate of return over 30 years, for example, was 7.27%, and its 10-year forecast was 7.21%, board materials showed.

Brian Guthrie, TRS executive director, told trustees the consensus among outside parties was that market returns will be significantly lower, and he stressed that “not taking action” to lower the assumed rate of return would not be prudent.

Lowering the fund’s assumed return rate has been debated by board trustees for a year. It is controversial because lower return rates will require higher contributions from the state, TRS members and school districts.

The Texas Legislature has the authority to set contribution rates. TRS will request a contribution rate increase of between 1.5% and 2% in its next budget request, fund materials showed.

The impact of the drop in the assumed return rate would increase state contributions to the pension fund by 1.83% or about $790 million per year over a 31-year funding period, according to estimates in a news release from the Texas Retired Teachers Association, Austin.