Clarification on Pension Projections

fundedratioandcontributionpolicy-5-0-return-featured

On April 10, I posted a couple of slides showing projections for the Rhode Island pension system produced by state actuarial consultant Gabriel Roeder Smith.  They showed the effects of pension reform on the system at the assumed 7.5% discount rate (i.e., rate of return) and if the returns came in a little low.  Joy Fox, spokesperson for General Treasurer Gina Raimondo has clarified, for the Current, what the second slide really shows:

The purpose of this slide was to demonstrate that even if the plan has a lower than expected return of 5% for the next 10 years, and 7.5% thereafter, the design of the plan should be affordable for Rhode Island. Although the plan takes much longer to get to 100% funding, the plan achieves a healthy funding level (80% funded) and stays there for the remainder of the projected period. With respect to the level of contributions, these are shown on the bottom of the slide and they continue to remain at a reasonable level (and actually decrease) over the projected period.

Put more specifically, the slide (reproduced below) assumes a 5% return on investment (2.5 percentage points below the assumed 7.5%) until the early 2020s, with the 7.5% assumption realized for the next forty or so years.  The annual contribution from the State of Rhode Island would, under those circumstances, remain above 20% of payroll for approximately another fifteen years, at which point the plan would be considered to be at “a healthy funding level.”

Funded Ratio and Contribution Policy, 5% Return

Ten years of a 5.0% return on investment extends the state’s annual contributions above 20% of payroll about another seven years and prevents its getting to the target annual contribution of approximately 5% of payroll for about an additional quarter century.  Obviously, a longer period of 5.0% returns would extend the higher payments.