Facing Reality is Hard

Public pension funds assume a certain rate of return when planning for the future. This rate of return tells governments how much money they need to add to the fund in order to maintain funding levels. Problem is, the assumed rate of return – usually around 8 percent – is often too high and unrealistic:

Many public pension funds have been averaging a little more than 3 percent a year for the last decade, so they have fallen behind where their planning models say they should be.

A growing number of experts say that governments need to lower the assumptions they make about rates of return, to reflect today’s market conditions.

But plan officials say they cannot.

“Nobody wants to adjust the rate, because liabilities would explode,” said Trent May, chief investment officer of Wyoming’s state pension fund.

In other words, the problem isn’t that the model they’ve crafted doesn’t reflect reality, it’s that reality is frightening and they want to keep it hidden.