"Now that's a pretty decent return but it's not the 15 percent annual return we saw over the last five years," he added. "Over the last five years, returns in equities were not driven by underlying economic growth, they were driven by unconventional monetary policy which is now on a path to normalization."
UBS recommends a strategic portfolio to include corporate bonds, high yield and emerging debt as well as equities to maximize returns over the next five to seven years.
Pension funds, especially public ones in the United States, typically use the 8 percent target - used to calculate contributions they need to cover future payouts - because it is the median annualized investment return for the past 25 years.
But already underfunded and facing increasing liabilities from ageing populations, pension funds will have even bigger deficits if they cut the return estimate. This means retirees will get lower payouts, or plan sponsors must pay more now.
Some pension funds are indeed facing up to the reality and cutting their return estimate. Calpers, the largest U.S. public pension plan, cut its assumed rate of return to 7.5 percent from 7.75 percent last year.
According to data from Washington-based think tank Pew Center, the U.S. state pensions achieved just 4 percent on average between 2000 and 2009.
Paradox Of Wealth
Ben Inker, co-head of asset allocation at U.S. manager GMO, says real equity return assumptions may have to come down to 3.5 percent, as opposed to the 43-year average of 5.7 percent on the S&P 500 index.
"The U.S. stock market is trading at levels that do not seem capable of supporting the type of returns investors have gotten used to receiving from equities," Inker said.
A more worrying long-term picture is painted by American financial theorist William Bernstein, who says increasing levels of wealth associated with economic growth drive down the return on capital across the global economy.