Investment Return Assumptions

Introduction

As of December 31, 2024, state and local government retirement systems held assets of approximately $6.2 trillion.1 These assets are held in trust and invested to pre-fund the cost of pension benefits. Because investment earnings account for a majority of public pension revenues, the investment return on these assets has an outsized effect on public pension plan funding levels and costs. A shortfall in long-term expected investment earnings must, over time, be made up by higher contributions, reduced benefits, or both.

Funding a pension benefit requires the use of predictions about future events, which are used to develop actuarial assumptions. Actuarial assumptions fall into one of two broad categories: demographic and economic. Demographic assumptions are those pertaining to a pension plan’s membership, such as changes in the number of working and retired plan participants; at what age participants will retire, and how long they’ll live after they retire. Economic assumptions pertain to such factors as the rate of plan participant wage growth and the future expected investment return on the fund’s assets.

As with other actuarial assumptions, projecting public pension fund investment returns requires a focus on the long-term. This brief discusses how investment return assumptions are established and evaluated, and recent trends and changes in assumed rates used by public pension plans.

Date  Published

June 2025

Contact

Keith Brainard, Research Director
Alex Brown, Research Manager

Download Issue Brief

 


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By joining NASRA, you gain the tools and resources to enhance the management of public retirement systems, ensuring their long-term success and reliability for generations to come.


 

What's New at NASRA: Public Pension Investment Return Assumption Brief Updated

NASRA’s latest update to standing issue briefs, Public Pension Plan Investment Return Assumptions underscores the critical role the investment return assumption plays in the financial health of public pension plans. Of all actuarial assumptions, it has the greatest impact on plan funding levels and cost. This brief traces how a decade of low interest rates and inflation, beginning in 2009, prompted many plans to reduce their long-term expected returns in line with more modest capital market projections. However, since inflation began rising in early 2021, the trend toward lowering return assumptions has largely paused. While reducing a plan’s assumed return can increase both costs and unfunded liabilities, setting this assumption is a careful, thorough process. It draws on expert input from actuaries and investment professionals and is guided by actuarial standards of practice.