Public pension funding is extremely sensitive to investment returns, according to a study by the Center for Retirement Research at Boston College.
To determine the sensitivity of pension funding to investment returns, the analysis projected funded ratios through 2042 for large public plans using a stochastic (variable) model of year-to-year returns; and a median real return of 4.45 percent, the average used by plans in 2012.
In 2012, the nominal, long-term return assumption used by state and local pension plans averaged 7.75 percent. While the nominal rate of return usually receives the most scrutiny, the assumed real return — the nominal return minus the assumed rate of inflation — is of primary importance, the report's authors found.
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