Planning for the Future

How does PERA set the investment rate of return?

The rate of return is one of the most important factors used in projecting the health of the fund. It is the presumed return on all of the investments made by PERA. Depending on the market and other conditions, the return on investment will vary year to year; however, it is the number that establishes the long-term average.

In life, we’re all taught to avoid assumptions. But you can’t run a massive financial engine without them because it helps PERA project how much income it will generate and, in turn, how the fund will grow over time.

So, here’s how the PERA Board seeks advice on making decisions about the rate of return:

  1. Input from a range of experts. Nationally-recognized investment consultants retained by the Board and independent economic experts offer their perspective on the rate of return using information from the capital markets. These are typically short-term outlooks from five to 10 years. 
  2. Analysis to help look ahead 30 years. The Board’s actuaries conduct a heavy-duty analysis (called a stochastic analysis) that helps bring order to random systems like the market. The actuaries run thousands of variations of market events, and, through this process, project market returns over 30 years—the timeframe PERA uses to determine estimates for the future. They make a recommendation on a rate of return based on this analysis. 
  3. Determination by the Board. The Board considers these recommendations and can decide to change the economic assumptions used by the plan. 

In November 2016, the Board changed the rate of return from 7.5 percent to 7.25 percent based on current market conditions. Previously, the Board lowered the rate in 2013 from 8.0 percent to 7.5 percent. The Board makes these adjustments to ensure PERA projections are accurately reflecting the economic climate today and in the future. 

Learn more about PERA’s diverse investment portfolio.