Bill Thielen | Pension360

Kentucky Pension Director: Fewer Active Workers, More Retirees Is Problem For Fund

Kentucky Retirement Systems (KRS) executive director Bill Thielen spoke in front of the state’s Pension Oversight Board on Monday, and revealed an as-yet unaddressed trend that spells bad news for the pension system.

The trend involves the balance of active workers to retirees receiving payouts – and the balance is not shifting in the pension system’s favor.

Reported by WFPL:

One problem that remains unaddressed, said Thielen, is the imbalance created by fewer employees paying into KRS and more retirees receiving benefits this year. Board members were told that between 2007 and 2014, the number of active members in the Kentucky Employee Retirement System dropped from 47,913 to 40,365, while the number of retirees grew from 33,849 to 41,223.

That difference represents $228.9 million in losses this year (not counting payouts for hazardous jobs), and Thielen said the state will see more increases in benefit payout during 2015. Overall pension benefits (for all sectors) paid “for fiscal 2014 totaled $1769.7 million compared to $1706.2 in fiscal 2013,” according to the audited data report.

“Our own staff at KRS, also. About 40-45 percent of staff will be eligible to retire,” he said, explaining that private sector wages have begun to lure state employees into early retirement as Kentucky employees go into a fifth year of wage freezes.

“Without raises, we’ll probably see a lot retire.”

The 21 percent funded KERS Non-Hazardous plan is a sub-plan of the Kentucky Retirement Systems.

Kentucky Chamber of Commerce Calls For Audit of State Pension System

The Kentucky Chamber of Commerce is pushing for an audit of the Kentucky Retirement Systems – specifically, a review of its investment performance and policies.

Reported by the Courier-Journal:

Chamber President and CEO Dave Adkisson announced Thursday that the group wants a review of the investment performance and use of outside investment managers — among other issues — at Kentucky Retirement Systems, which has amassed more than $17 billion in unfunded liabilities.

While the state has made progress in addressing pensions, “serious problems persist that pose a significant threat to the state’s financial future,” Adkisson said. “The business community is concerned about the overall financial condition of our state.”

[State Auditor Adam] Edelen said in a statement Thursday that he shares the chamber’s concerns, but he also noted that at least three major reviews of KRS have occurred over the past few years.

[…]

KRS Executive Director Bill Thielen said officials will fully cooperate if Edelen decides to perform an audit. But also he pointed out that the system has been subject to continuous examinations, including audits, legislative reviews and a two-year investigation of investment managers by the federal Securities and Exchange Commission.

“None of those have turned up anything that is out-of-sorts,” he said. “A lot of the questions or concerns that the chamber seemingly raised have been answered numerous times.”

Thielen added that KRS doesn’t disclose the individual fees it pays managers because confidentiality helps officials negotiate lower rates.

State Auditor Adam Edelen said Thursday he hadn’t made a decision on whether to begin an audit of KRS. He said in a press release:

“For this proposed exam to add value and bring about real fixes to the system, it will require broad, bipartisan support and additional resources for our office to conduct the highly technical work…We have begun discussing the matter with stakeholders. No final decision has been made at this time.”

The founder of one retiree advocate group laid blame for the system’s underfunding on the state’s contributions, not investment policy, and was skeptical that the audit would yield fruitful results. Quoted in the Courier-Journal:

Jim Carroll, co-founder Kentucky Government Retirees, a pension watchdog group organized on Facebook, called the proposed audit a “red-herring” and argued that the financial problems in KERS non-hazardous are the result of year of employer underfunding.

He said KRS investments don’t yield the returns of some other systems because the low funding levels force them to invest defensively.

“I’m skeptical that anything useful would come out of another audit,” he said. “Not to say that there shouldn’t be more transparency, but that’s a separate issue.”

KRS’ largest sub-plan – KERS non-hazardous – is 21 percent funded.

Kentucky Retirement System Lowers Return Assumption; More State Money On Way

CREDIT: The Center For Retirement Research

The Kentucky Retirement System has lowered its assumed rate of return on investments from 7.75 percent to 7.5 percent.

The reduced assumption means the system will experience an uptick in unfunded liabilities, but it also ensures a higher annual payment from the state.

The action took place at a Board of Trustees meeting on Thursday. More details from CN 2:

The changes, presented to trustees earlier this year by actuaries with Cavanaugh Macdonald Consulting based on a five-year experience study, lower assumed returns on investments, price inflation, wage growth and wage inflation.

The new assumptions, KRS Executive Director Bill Thielen said, will cost the state roughly $95 million more per year in contributions for the Kentucky Employees Retirement System for state employees in non-hazardous positions during the next biennial budget, based on current plan valuations and payroll figures. They will not take effect until next year’s year-end plan valuations, he said.

[…]

The updated assumptions would push KRS’s unfunded liabilities to $19.5 billion, up from $17.8 billion currently, according to figures presented by Cavanaugh Macdonald Consulting.

At least one of the KRS trustees voiced concerns about approving the new guidelines at Thursday’s meeting. Personnel Cabinet Secretary Tim Longmeyer suggested delaying a vote until January so the board could meet with the governor’s office, legislators and others affected by the change.

“My concern is we don’t live in a bubble, so $95 million a year is a significant uptick,” said Longmeyer, who abstained from voting on the updated assumptions.

KRS Trustee Randy Overstreet, though, urged the board to move forward with the proposal. Nothing would change between now and January, he said.

“I’m thinking that we almost have the responsibility to follow the experts’ recommendations, and you’re right, it’s not a science, but it’s the best information we have to act on and move forward on since we have for the 20 years I’ve been on this board,” Overstreet said.

More context on KRS’ new assumed rate of return, from the Courier-Journal:

KRS has forecast a 7.75 investment return since 2007. But earnings in KERS non-hazardous averaged only 6.52 percent over the past decade, leading some critics — including lawmakers — to argue for a more cautious outlook.

The National Association of State Retirement Administrators reported that of 126 public retirement plans surveyed in October, 48 assumed a return of 7.5 percent or lower, while 78 assumed a higher rate.

The median rate was 7.75 percent, but more than half have cut their assumption since 2008, the group said.

KRS administers nearly a dozen defined-benefit plans for state workers, including the 21 percent funded KERS non-hazardous plan.