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The actuarial assumptions used in the December 31, 2024 valuation were based on the PMRS Experience Study for the period covering January 1, 2014 through December 31, 2018 issued by the actuary in September 2020 as well as subsequent Board approved assumption changes.
The PMRS System’s long-term real rate of return on pension plan investments was determined using a building-block method in which best-estimates of expected future nominal rates of return (net of investment expenses) are developed for each asset class. These returns are combined to produce the System’s Long-Term Expected Real Rate of Return by calculating the weighted average return for each asset class using each respective target asset allocation percentage and multiplying by the expected future nominal rate of return, while also factoring in covariance across asset classes, then deducting expected inflation (2.5%). Best estimates in geometric real rates of return for each utilized asset class are included in the pension plan’s target asset allocation as of December 31, 2024 and summarized in the table below labeled “System Nominal Net and Real Rates of Return by Asset Class”.
System Nominal and Real Rates of Return by Asset Class
| Asset Class | Target Asset Allocation | Nominal Rate of Return | Long-Term Expected Real Rate of Return |
|---|
| Domestic Equities (large capitalized firms) | 24.50% | 7.39% | 4.89% |
|---|
| Domestic Equities (small capitalized firms) | 8.00% | 8.30% | 5.80% |
|---|
| International Equities (international developed markets) | 14.50% | 8.03% | 5.53% |
|---|
| International Equities (emerging markets) | 3.00% | 8.39% | 5.89% |
|---|
| Global Equities | 5.00% | 6.44% | 3.94% |
|---|
| Real Estate | 10.00% | 6.38% | 3.88% |
|---|
| Timber | 5.00% | 5.57% | 3.07% |
|---|
| Fixed Income (Core Investment Grade) | 24.00% | 5.01% | 2.51% |
|---|
| Fixed Income (Opportunistic Grade) | 5.00% | 6.85% | 4.35% |
|---|
| Cash | 1.00% | 3.11% | 0.61% |
|---|
| Total Portfolio | 100.00% | 7.29% | 4.79% |
|---|
Based on the aforementioned methodology, the PMRS Board established the System's Long-Term Expected Rate of Return at 7.29%.
In addition to determining the System’s Long-Term Expected Rate of Return, the PMRS Board, under the laws of the Commonwealth of Pennsylvania (Act 15 of 1974), is obligated to develop and apply the Regular Interest Rate to each of the individual participating municipalities’ actuarial asset accounts held by PMRS. The rationale for the difference between the System’s Long-Term Expected Rate of Return and the individual participating municipalities’ Regular Interest Rate is described in the following section “Discount Rate.” As of December 31, 2024, this rate is equal to 5.50%.