Illinois Municipal broadens PE focus as it mulls reducing assumed returns

  • AUM: $42.4 bln
  • Actual allocation to alternatives: 4 pct
  • Target: 7 pct
  • Whom to contactDhvani Shah, chief investment officer (
  • Why this is important: LPs have been reducing their assumed investment returns because of market concerns

Illinois Municipal Retirement Fund’s board at its Dec. 14 meeting will consider reducing its assumed rate of investment returns, driven by concern about higher market volatility and decreasing returns across asset classes.

The pension system has maintained 7.5 percent assumed returns for 25 years.

This is the second time the pension system’s actuarial consultant, GRS Retirement Consulting, urged the board to consider reducing the assumed rate of return to 7.25 percent. The Illinois Municipal board last year declined to reduce the assumed return rate.

More risk

To meet the 7.5 percent assumed returns, Illinois Municipal takes much more risk in its portfolio, the GRS presentation said.

Preferably, the assumed investment return should be reduced by 50 basis points, GRS said in its presentation.

Historical total returns of 8 percent were largely driven by high inflation, which is not expected to be repeated, the GRS presentation said.

Further sharper volatility would reduce the median return by about 50 basis points from historical averages, the presentation said.

Even though the alternatives allocation was reduced to 7 percent from 8 percent this year, Illinois Municipal moved assets from its equity portfolio to boost allocations in alternatives, a source familiar with the fund told Buyouts.

The pension system also widened its PE focus to increase commitments to emerging and minority managers.

Illinois Municipal’s $1.3 billion PE strategy, accounting for more than 80 percent of its alternatives portfolio, delivered strong returns for the total portfolio in 2018.

Indeed, Illinois Municipal’s PE returns beat the assumed investment return of 7.5 percent, returning 14.87 percent over one year, 11.64 percent over three years, 12.51 percent over five years and 7.96 percent over 10 years for the period ended June 30, 2018.

Lowering the actuarial assumed rate of return should not affect the asset-allocation strategy or actual investment return to the plan, the GRS presentation said.

Downward trend

 Median assumed investment returns at public pension systems are now below 7.5 percent and falling, Keith Brainard, research director at National Association of State Retirement Administrators, said.

Public pension funds are lowering their assumed returns because projected returns across all asset classes are expected to decline in the coming years, Brainard said.

Several systems lowered their assumed investment returns this year. California State Teachers’ Retirement System reduced its assumed return to 7 percent in July, part of a two-year process to reduce assumed returns from 7.5 percent in 2017.

  • Ohio Public Employees Retirement System in October reduced its assumed rate of return to 7.2 percent from 7.5 percent.
  • Teacher Retirement System of Texas in July reduced its assumed rate of return to 7.25 percent from 8 percent
  • Maryland Public Employees’ Retirement System and Maryland Teachers Retirement System in July pared theirs to 7.45 percent from 7.5 percent.
  • Michigan Public School Employee Retirement System in 2018 reduced its assumed rate to 7.05 percent from 7.5 percent
  • Minnesota Teachers Retirement Association this year reduced to 7.5 percent from 8.5 percent
  • Chicago Public School Teachers this year reduced its assumed rate of return to 7 percent from 7.25 percent.
  • California Public Employees’ Retirement System in 2017 decided to reduce its assumed returns to 7 percent from 7.5 percent over three years.
  • Kentucky Retirement Systems also reduced its assumed rate of returns from 7.25 percent to 6.25 percent in 2017.

Indeed, more than 40 percent of public-sector actuaries recommended assumed investment returns between 6.5 percent and 7 percent.

About 30 percent recommended assumed returns between 7.01 percent and 7.25 percent and only a little more than 10 percent of public-sector actuaries recommended assumed returns of 7.26 percent to 7.5 percent, the GRS presentation said.

Action Item: Read the GRS presentation: