SamCERA’s Board of Retirement has decided to reduce its long-term investment return assumption from 7.5% to 7.25%. The investment assumption—also called the “assumed earnings rate”—is the annual amount the fund is expected to earn through its investments in stocks, bonds, real estate, and other segments of its portfolio.
Lowering the rate to 7.25% (along with related inflation and wage assumption changes) will result in an estimated 2% of payroll increase for SamCERA’s three employers (San Mateo County, the Superior Court of San Mateo County, and the San Mateo County Mosquito and Vector Control District). But because the County is voluntarily paying an average contribution rate which is higher than the rate recommended by SamCERA’s actuary, the rate paid by the County is expected to remain the same.
Lowering the assumed earnings rate will, however, increase member contributions. Based on figures provided by SamCERA’s actuary, the average increase for members will be between $6 and $7 per pay period. Of course, members with higher or lower pay than average will see higher or lower increases.
Because of strong earnings over the last few years, SamCERA has deferred investment gains that have not yet been recognized in the actuarial smoothing process. The current investment year—which will end on June 30—is also likely to exceed expected returns. As such, SamCERA is in a good position to lower its investment assumption and have a minimal impact on employers and members. Lowering the rate will also add to the financial strength and stability of the fund by mitigating the impacts if future returns are lower than current expectations.
The Board of Retirement adopted the 7.25% investment return assumption at its June 3, 2014, meeting. The new rate will become effective with the June 30, 2014, actuarial valuation.
The last time SamCERA’s assumed earnings rate was changed was in May 2012, when it was lowered from 7.75% to 7.5%.
