INSIGHTS

Introduction to required return

Many public pension programs today are making significant, sometimes unpopular, decisions to lower discount rates and alter benefit structures to meet their funding obligations. More than ever, fiduciaries need a framework for decision-making to understand the risks engendered by these types of decisions: one that is clear, simple, and actionable. In our latest paper from our topic of interest series, we introduce the concept of “required return”. The following topics are addressed:

  • Building upon discount rates and providing a more direct link between assets and liabilities improves the likelihood that plans will meet their objectives.
  • Fiduciaries gain additional investment insight with a simple framework that starts with the question, “What return is needed?”
  • The main decisions a board can make are to modify its asset allocation and change its contribution policy. Understanding the risks implicit in these decisions is the goal of this metric.