Kentucky Pension Investment Performance Lags Behind Peers, System Says


Kentucky Retirement Systems officials met with lawmakers on Monday as they presented the findings of an internal study to the Pension Oversight Board.

The study examined how KRS investment performance stacks up with other, similar funds.

Officials said the study indicated that the system’s investments were performing at rates that lagged behind their peers as well as the system’s own assumed rate of return.

More from the Northern Kentucky Tribune:

The 10 peer states–Indiana, Kentucky, Louisiana, Maryland, Massachusetts, New Jersey, Rhode Island, South Carolina, Virginia, and West Virginia–were chosen for the similarities in their investment mixes. But even through this seemingly narrow frame of reference, Kentucky still lingers at the bottom of the list: the state’s investments are returning at a 6.8 percent rate compared with list-topping Louisiana, whose investment spread is paying off at an 8.3 percent rate of return.

Though Kentucky legislators have set a target 10-year return rate of 7.75 percent for their investments, Cracraft cautioned the Board that none of Kentucky’s peer states have consistently met that target, nor have any of the 44 states with similar pension plans.


Measuring investment outlooks at one, three, five, and 10 year forecasts, KRS returns lagged behind other plans at nearly every turn.

KRS’ particular mix of investments has less investment in U.S. equities than the others, with 10.6 percent in hedge funds, 11.2 percent in private equity, 2.9 percent in real estate, and 9.8 percent real funds.

Cracraft said allocations to hedge funds is a trait shared by the six lowest performers.

“The takeaway here for me and the group of staff,” said Cracraft, “was that when compared to plans we feel are taking a similar approach, while KRS appears to be slightly below, it’s performing in line with the group.”

Pension officials also reported a piece of sobering news: if investment performance stays flat for the rest of the fiscal year, the system will lose $168 million in assets.

Kentucky Pension Audit Would Cost at Least $150k, Says State Auditor


Kentucky’s Chamber of Commerce last month called for an audit into the Kentucky Retirement Systems.

This week, Kentucky’s top auditor revealed that such an endeavor would cost at least $150,000 and require the expertise of outside investment experts, which could raise the cost further.

The audit would focus on the investment polices at KRS and its reliance on outside money managers.

More from the Courier-Journal:

State Auditor Adam Edelen says an effective review of Kentucky’s crippled pension system would cost at least $150,000 and require help from outside investment experts.


“My office, which has struggled with deep budget cuts similar to those imposed on other state agencies, would need upfront financial resources to launch this work,” Edelen wrote. “It is difficult to put a price tag on such an investigation due to the legal uncertainties we’d face.”

The Kentucky Chamber of Commerce called on Edelen last month to launch an investigation into investment policies at Kentucky Retirement Systems, and Edelen has cautioned from the beginning that such an audit would require additional resources and bipartisan support.


Meanwhile, KRS has faced growing scrutiny for allocating large portions of its investment portfolio toward private equity and hedge funds.

Critics also question its reliance on external investment managers, who handle around 80 percent of the system’s market assets and can charge millions in fees.

Edelen wrote in his letter Thursday that both issues are a concern. Still, he cautioned that pension officials might use contract confidentiality clauses to withhold key documents and that thorough analysis of investment strategies will require outside consultants.

“An investigation of this scope would not cost less than $150,000, barring significant legal and consulting expenses that we might also incur,” he said.

The largest plan for the state’s public workers, KERS non-hazardous, is only 21 percent funded.


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

Kentucky flag

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 Pension Committee Recommends Measures For Funding Improvement, Other Policy Changes

Kentucky flag

Kentucky’s Public Pension Oversight Board, a panel of lawmakers that “assists the General Assembly with its review, analysis, and oversight” of the Kentucky Retirement Systems (KRS), has made 13 recommendations aimed at improving the health of KRS and altering other KRS policies.

A handful of the key recommendations, from the Courier-Journal:

– The General Assembly should secure additional money to stave off any insolvency problems in KERS non-hazardous — the largest pension plan for state workers, which has only 21 percent of the money it needs to cover benefits.

– The Kentucky Teachers’ Retirement System, along with pension plans for lawmakers and judges, should be reviewed by the oversight board as part of its official duties.

– KRS should better publicize its board meetings, particularly to employee, retiree and interest groups.

– The General Assembly should enact legislation to regulate how agencies withdraw from the pension system — a concern that has emerged amid the bankruptcy of Seven Counties Services, the community mental health center for the Louisville area.

More on the measures related to improving the system’s funding situation, from CN2:

Of 13 recommendations tentatively approved by the oversight board, two dealt directly with securing additional funding for KERS non-hazardous. One, submitted by Sen. Jimmy Higdon, R-Lebanon, would seek financing to maintain the plan’s solvency while the other, filed by Rep. Brent Yonts, D-Greenville, and Sen. Joe Bowen, R-Owensboro, would support increased funding to KRS and particularly KERS non-hazardous to improve its cash flow issues.

One other recommendation seeks to cut down pension “spiking”. Eliminating “spiking” is not likely to have a big effect on the system’s funding situation.

Retiree advocacy group Kentucky Government Retirees released this statement on the proposals dealing specifically with improving funding:

As stakeholders in Kentucky Retirement Systems, we were gratified that the Public Pension Oversight Board today approved a recommendation calling upon the General Assembly to provide additional funding to avert insolvency in the Kentucky Employees Retirement System non-hazardous fund. The nation’s worst-funded state pension fund desperately needs an infusion of funds above the employer contributions. We hope the 2015 General Assembly will make the difficult decision to act on this recommendation.

Kentucky Bill Aims To Increase Transparency, Accountability In Retirement System

flag of Kentucky

Kentucky State Rep. Jim Wayne has introduced legislation that would infuse a ray of transparency into the state’s retirement systems, including KRS, a system oft criticized for its opaque practices.

From the Independent:

The legislation, Bill Request 91, would require state-administered retirement systems to operate under the state procurement laws, which includes making contracts public. It would also prohibit the use of placement agents, intermediaries who have been involved in pay to play scandals in other states.

The legislation also seeks to tighten requirements for KRS board members appointed by the governor to ensure they have appropriate investment expertise. The current low-qualified “investment experts” on the board refused to comment on any investment issues for the Kentucky Center for Investigative Reporting story, Wayne said. He added the two investment experts on the board need to be knowledgeable, independent and willing to be accountable to the public.


“The current model smacks of the good ol’ boy system,” said Wayne, D-Louisville. “The system is closed. A small group decides behind closed doors who gets to manage billions of dollars in public money and what they’ll get paid for it, no questions allowed. That’s just way to chummy for my tastes.”

The urgency for such legislation was illustrated after two journalism organizations investigating the pension plans during the summer were denied information on fees and even the names of individual managers, Wayne said.

The Lexington Herald-Leader reported June 14 that KRS spent at least $31 million on managers of hedge funds, private equity, real estate and other “alternative investments” that hold just one-fourth of the system’s $15 million in assets and produced its lowest returns.

A July 24 report by the Kentucky Center for Investigative Reporting in Louisville found KRS potentially spent $156 million in mostly undisclosed fees to these “alternative investments.”

Wayne added one more comment:

“The health and well-being of public employee retirement systems should not be shrouded in mystery,” said Wayne. “No one should be required to invest their hard-earned money in a system that is not fully transparent. Not only should public employees know if the systems are financially stable, the taxpayers should also know.”

The Kentucky Retirement Systems holds $16 billion in assets and is about 45 percent funded, although certain parts of the system are unhealthier.

KRS allocates about 35 percent of its assets toward alternative investments, including real estate; the nationwide average is 25 percent, according to data from Cliffwater LLC.

Chart: How Kentucky’s Alternatives Allocation Compares To Other Funds

KY alternatives percentage

The Kentucky Retirement Systems, more than almost any pension fund in the country, allocates a significant chunk of its assets toward alternatives.

But how does KRS compare to other pensions funds in that area? Check out the chart above.

The data is from the Public Fund Survey, which polls 98 pension funds every year on a variety of topics, including asset allocation.

Only 4 funds in that 98 fund sample allocated a higher percentage of its assets toward alternatives than Kentucky.

Chart is courtesy of the Kentucky Center for Investigative Reporting.