How has the decline in assumed returns affected plan costs?

Abstract

The brief's key findings are: (1) Public pension plans have lowered their investment return assumptions, which generally raises costs by requiring larger contributions to fund promised benefits. (2) However, the decline in assumed returns is due to lower expected inflation, which should have no effect on costs in an inflation-indexed system. (3) At the same time, plans have increased their assumed real (i.e., net of inflation) investment returns, which lowers costs. (4) Thus, plans could have lowered costs with these two assumption changes. (5) But, public plans are not fully indexed so their real costs actually increase as the inflation assumption falls. (6) The net effect of these changes has been to increase costs, but the increase is much smaller than if the decline in the assumed return was due to a lower real return.