Interest rate assumptions are key variables in balancing the actuarial valuation equation. The investment return assumption reflects anticipated returns on the pension plan’s current and future assets. Meanwhile, the discount rate assumption is used to determine the present value of expected future liabilities. Reinforcing this relationship, generally, public pension plans match the assumed investment return and the discount rate. Thus, should actual returns deviate from the expected values the significance will be expressed in the plan’s assets and liabilities. In total, over the last 29 years, lower than expected investment returns and changes in actuarial assumptions have increased the State of Illinois’ unfunded pension liability by approximately $33.5 billion or roughly one third of the total increase in the unfunded liability during that period. In part three of our Illinois Pension Series, Components of Change in the UAAL, we will elaborate on the relationship between assumed versus actual investment returns, touch upon the performance of the State of Illinois’ pension bonds, and compare the condition of the State of Illinois’ pension system relative to five other states.
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