Rhode Island’s pension fund (mainly covering state employees and teachers) hasn’t been doing very well at the investment market’s poker table. According to a Dec. 16 article by Katherine Gregg (“R.I. pension fund sharply lags expectations again”), the $7.63 billion fund has seen only a 0.88 percent return on its investments during the calendar year now coming to a close. The pension system’s financial plan requires a 7.5 percent return every year.
The reaction of General Treasurer Seth Magaziner, a Democrat, in the article is so wholly inadequate that he ought to be made to spend the next few weeks of news cycles backtracking: “The assumed rate of return reflects an expectation for the average performance of the pension system over the long-term; we do not expect the pension fund to meet this target each individual year,” he said.
Pressed on the wisdom of keeping the predicted return so high compared with recent results, Magaziner continued, “Our actuary has recommended that the current investment assumption remain in place for the time being, but we will continue to evaluate the situation.”
Anybody who’s read through a handful of pension reports will suspect that the actuary doesn’t really “recommend” an assumed rate of return so much as tell officials whether the rate that they find politically comfortable is outlandish for financial reasons. The question isn’t, “Is this the correct investment return to predict?” Rather, it is, “Would it be reasonable of us to predict this investment return?” The difference is critical.