There has been a lot of hand wringing over the North Carolina Retirement System Pension Fund investment returns - as well there should be. As I've documented previously on this blog, the returns could have been substantially higher had Richard Moore and Janet Cowell not squandered billions on a failed foray into alternative investments.
In
Treasurer Cowell's most recent investment performance report, the pension earned an annualized return of just 5.8% per year over the last 15 years ending 6/30/2016. This return is far below the actuarial assumed rate of return of 7.25%. These figures have led some to question if the 7.25% return is attainable long term and should it be lowered? I honestly do not know the answer to that question, but for what it is worth, I made a trip to the State Library and collected 42 years of NC pension investment returns from old, dusty annual reports from the Department of State Treasurer.
I calculated a geometrically-linked annualized return for the 40 years that came to 7.9% for the NC pension fund. As a point of reference the S&P 500 Index return was 11.0% while the Barclays/Lehman Aggregate Bond Index return was 7.7% for the same 40 year period ending 6/30/2016.
While interesting, I'm not sure how helpful these return data are. In the 70's and into the 80's more than 85% of the pension was invested in investment grade bonds with less than 15% allocated to stocks. By 2000, the fund was invested 60% in stocks and 40% in bonds. Today, 28% of the fund is invested in neither stocks or bonds, but in other "alternative" investments. Thus, history is not particularly helpful for predicting future returns.
Something else I discovered in the old annual reports, as recently as the early 80's the actuarial assumed rate of return was just 6%. At some point it was raised and we now assume 7.25%. Of course the problem with any assumption is that inflation was double digits in the 70's and near zero more recently. Thus, picking an "absolute" assumed rate of return for a pension fund with an infinite time horizon is a fools game from the start. Almost every economic study begins by adjusting figures for inflation. It might be helpful for actuaries to try to incorporate some sort of assumed return over and above inflation, instead of changing the absolute return assumption every 20 years?
For what it is worth, here are the 42 years of return data I found:
| NCRS Pension Returns |
| as
of 6/30/2016 |
|
|
| Time |
Annualized |
| Period |
Return |
| 1-Year |
0.8% |
| 5-Year |
6.0% |
| 10-Year |
5.5% |
| 15-Year |
5.8% |
| 20-Year |
6.6% |
| 25-Year |
7.0% |
| 30-Year |
7.5% |
| 35-Year |
7.9% |
| 40-Year |
7.9% |
| 42-Year |
7.8% |
| NC Pension Returns |
| years ending
6/30 |
|
|
| Year |
Return |
| 2016 |
0.80% |
| 2015 |
2.25% |
| 2014 |
15.88% |
| 2013 |
9.52% |
| 2012 |
2.21% |
| 2011 |
18.48% |
| 2010 |
11.97% |
| 2009 |
-14.22% |
| 2008 |
-2.07% |
| 2007 |
14.82% |
| 2006 |
7.23% |
| 2005 |
9.85% |
| 2004 |
12.01% |
| 2003 |
7.56% |
| 2002 |
-4.04% |
| 2001 |
-2.0% |
| 2000 |
9.0% |
| 1999 |
10.7% |
| 1998 |
19.4% |
| 1997 |
8.9% |
| 1996 |
9.5% |
| 1995 |
8.3% |
| 1994 |
8.5% |
| 1993 |
9.0% |
| 1992 |
8.8% |
| 1991 |
8.8% |
| 1990 |
9.1% |
| 1989 |
9.3% |
| 1988 |
11.5% |
| 1987 |
10.6% |
| 1986 |
11.2% |
| 1985 |
10.4% |
| 1984 |
9.9% |
| 1983 |
10.6% |
| 1982 |
9.7% |
| 1981 |
8.8% |
| 1980 |
8.1% |
| 1979 |
7.6% |
| 1978 |
7.1% |
| 1977 |
6.9% |
| 1976 |
6.8% |
| 1975 |
6.6% |
