Detroit’s broken pension promises were based, in part, on an assumed 8 per cent return on investment, within the range accepted by most US state and municipal sponsors. That is likely to prove a multiple of what it should have been, even if the “risk-free” return on Treasuries were to return to a long-term norm. A 5 or 6 per cent rate of return assumption is aggressive enough. The added phantom returns compound the pension plans’ underfunding by justifying reduced employer contributions or higher benefits.All the little modeling tricks, illiquidity premiums, and PowerPoint charts used by portfolio managers to lure plan sponsors will come back to haunt them for decades to come. At some level of consciousness, everyone in the business knows this is true. Look forward to explaining to the neighbours they can’t retire when they thought they could because you were complicit in the lie that you could beat the index.
Emphasis ours. Ouch. Read the whole thing here.[Detroit image courtesy of Shutterstock]