State pension systems dropped the rate of return they assume for their investment portfolios again, continuing a two-decade long trend that public-finance experts say is necessary, even as it presents some challenges for the entities that participate in such plans.

The median assumed return in 2021 is 7.20%, according to a report published early in May by the National Association of State Retirement Administrators, down roughly 1 percentage point since 2000, as the investment managers charged with managing trillions of dollars for municipal retirees have adapted to a more challenging market environment.

“Long-term growth projections have come down pretty significantly from the rates of growth we saw going back to the 1990s,” said Greg Mennis, director of the public sector retirement systems project at the Pew Charitable Trusts.

“That’s important because economic growth translates into corporate profits, which translates into asset returns. Having the most accurate possible rate of return means your liabilities are being calculated correctly and reduces the risk you’re setting the bar too high,” Mennis said.

Public pension administrators must figure out how much their plans will need to pay out for every retiree that comes through the system, for decades into the future — and how they will reach that number, using contributions from current employees and employers, as well as investment returns.

All else equal, if a pension system is assumed to earn less from investing, that means it must take in more from municipal employees and employers. Every year, pension system actuaries calculate that amount and translate it into the “bill they send to the city,” as Mennis calls it.

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