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Will Brownsberger
State Senator
2d Suffolk and Middlesex District

The 8.25%: PRIT’s long-term actuarial target rate of return

In recent months, Senator Brownsberger has engaged in discussions with government officials regarding the actuarial target rate of return for the Massachusetts Pension Reserves Investment Management Trust fund (PRIT).

The PRIT fund is the state’s pension fund, established by the legislature in 1983 to address the state pension system’s unfunded liability.

PRIT’s long-term actuarial target rate of return was first set at 8.25% in line item 0612-1010 of the FY98 budget, available here: http://archives.lib.state.ma.us/actsResolves/1997/1997acts0043.pdf.

The Pension Reserves Investment Management Board (PRIM) has adopted the 8.25% as part of the PRIT Fund Investment Policy Statement, available for download here: http://www.mapension.com/publications/.

More details on the origins of the 8.25%, as well as an analysis of PRIM’s investment philosophy, can be found in this paper updated and published in 2007 by the Harvard Law School Labor & Worklife Program: http://urban.ouce.ox.ac.uk/wpg06-16.pdf.

Treasurer Steve Grossman has stated  that he would like to see the target rate lowered to 8%. See http://ebn.benefitnews.com/news/massachusetts-treasurer-pension-reform-2727120-1.html. This new rate would account for volatile market conditions. In a  State House News Service story published on July 23, 2012, Andy Metzger  reported that although the average annual return has been 9.5%, the average for the past decade has been 6.5%. Metzger reported that Treasurer Grossman  believed the Fiscal Year 2014 budget could be the right vehicle to effect this change to the rate of return.

What is the proper role of the legislature in looking at PRIM’s investment strategy? While it may be prudent for the legislature to define broad investment policy parameters, such as the rate of return, it would be wise to leave asset allocation and other investment management decisions to the investment experts at PRIM. At the same time, should we consider an actuarial rate of return more conservative than the Treasurer’s proposed 8%? Should the legislature go further and free PRIM to set its own actuarial target rate of return? Arguably, the legislative mandate in the FY98 budget has expired. Although the target rate of return is a long-term target, returns in the next few years could fall short of the 8.25% mark. While the market may be improving, the minus-29.5% return in 2008 was a bitter pill to swallow and underscored the benefit of a more conservative investment approach in light of the volatility in the market. A less conservative approach allows for the possibility of greater gains- but also harder losses.

Senator Brownsberger tends to believe that setting a somewhat lower target would be prudent because it would encourage investment policies that would expose the Commonwealth to less risk, but he is not sure how much lower the target should be.

Anne Johnson Landry
Committee Counsel and Policy Advisor
Office of State Senator William N. Brownsberger

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