Assumed Rate of Return

In Detail

The assumed rate of return is the annual investment gain a pension plan projects for its portfolio. This assumption is critically important because it directly affects how much money the plan sponsor must contribute each year — a higher assumed return means lower required contributions because the plan expects investments to do more of the heavy lifting. Most public pension plans assume returns of 6.5-7.5%, while private-sector plans tend to use somewhat lower assumptions due to ERISA requirements. Critics argue that many public plans set their assumptions too high based on historical averages that may not persist.

Over the past two decades, actual returns for many plans have fallen short of assumptions, contributing to growing unfunded liabilities. When plans consistently miss their assumed returns, the shortfall compounds over time like unpaid interest on a debt. The National Association of State Retirement Administrators tracks assumed returns across public plans and reports a gradual decline from an average of about 8% in 2000 to roughly 6.9% today. Lowering the assumed return is financially prudent but politically difficult because it immediately increases the required employer contribution, straining government budgets.