An 8.5 percent actuarial assumption?

If I didn't have so many relatives who are retired school teachers, now counting on the Pennsylvania Public School Employees' Retirement System for their monthly checks, this story($) in today's Wall Street Journal would probably have escaped further scrutiny. But, since I do, it didn't.

In discussing how pension fund managers are largely undeterred after the events of the last year, as eager as ever to direct school teachers' retirement money toward hedge funds as part of a never-ending quest for higher returns, this little gem about actuarial assumptions in the Keystone State was stumbled upon.

"We have an 8.5% actuarial assumption, and ... we have to look for programs that can reach that level," said Alan Van Noord, chief investment officer at the $54.7 billion Pennsylvania Public School Employees' Retirement System. "There are very few asset classes that you can get [returns] above 8%."

I'd get on the phone to let some people back East know about what kind of assumptions Mr. Noord has been working with and how they might affect their retirement income stream over the long-term if there was something they might be able to do about it.

Maybe, I'll call anyway.

Is this typical? To assume a return of 8.5 percent?

Everyone knows what happens when you assume...

If this is a fairly standard approach, it surely speaks volumes about this first decade in the new century - a period when short-term interest rates have averaged just a couple percent and giant pension funds are operating under the belief that they can make annual returns four times as high.

Given what's happened since the summer, when asked, they ought to at least say something like, "We're taking a close look at our investment options at the moment". Or, better yet, "We're taking a close look at our investment assumptions right now", but apparently not.

That pension funds remain committed to hedge funds may be a surprise given the industry's recent problems, where total assets have shrunk to about $1.5 trillion from nearly $2 trillion in June.
...
Even some pension funds that cashed out of hedge funds recently are now returning. A few months ago, the $8.5 billion School Employees Retirement System of Ohio, or SERS, shelved its investments in hedge funds. Last week, the pension fund's board approved moving right back in.

"Fundings will probably be restarted during the first quarter of 2009, but no definite dates were determined," said Tim Barbour, a spokesman for SERS.

Then again, if you're a retired teacher in Ohio, you may have more important things to worry about than the choices being made by your pension fund managers.

With a population of 12 million, the Pennsylvania's teachers' retirement system holds a total of $55 billion in assets, but with just one million fewer people living in Ohio, their pension fund holds only $8.5 billion.