The Kentucky Retirement System will undergo a level two actuarial audit this summer conducted by an outside firm the system has hired, according to KRS Executive Director Bill Thielen.
Thielen informed the Public Pension Oversight Board of the system’s decision to undertake the audit at a meeting Monday. Thielen said the group has hired Segal Consulting to conduct the actuarial audit with a contract beginning on May 1.
The audit, which was a suggestion of the Public Pension Oversight Board, will cost KRS $98,500 and the system is expecting a report from the group on August 1 and will present the findings to their board at a September meeting. The Kentucky Chamber of Commerce has previously supported efforts to conduct actuarial audits of the system.
The Kentucky Chamber has also called on state Auditor Adam Edelen to conduct a comprehensive performance audit of the Kentucky Retirement System to ensure the financial stability of the system. Edelen has expressed interest in performing the audit and has waited on agreement from legislative leaders on funding to bring in outside groups to conduct an independent non-partisan audit.
Kentucky Chamber President and CEO Dave Adkisson says that a performance audit is different from a regular financial audit in that it examines how an organization is performing based on important benchmarks. The Chamber believes a comprehensive performance audit of KRS is needed to examine a number of important factors, including:
- How the system’s investment performance compares to other state pension funds and the reasons for any underperformance.
- How the investment fees paid by KRS compare to those in other states and whether those fees are reasonable.
- The accuracy of the assumptions made by the system’s actuary about current liabilities and the amount of the actuarially required contribution compare to actual experience (including the accuracy of assumptions about: the rate of return on investments; salary increases for public employees; the cost of health insurance; the rate at which employees are retiring; and other factors).
According to the Government Finance Officers Association, a level two actuarial audit—which KRS has decided to pursue–involves the following:
In a level two actuarial audit, the reviewing actuary does not fully replicate the consulting actuary’s valuation, but instead uses a sampling of the plan’s participant data to test the results of the valuation. The reviewing actuary also examines the consulting actuary’s methods and assumptions for reasonableness and internal consistency.
The last significant audit of KRS by then-State Auditor Crit Luallen was conducted in June of 2011—three and a half years ago—and focused on the use of private placement agents by KRS to make investments. While that audit found problems with the system’s use of placement agents, it did not focus on any of the performance areas the Chamber highlighted in its resolution.
At the meeting Monday, it was also announced that KRS Executive Director Thielen will be leaving his position at the end of the year. Thielen told lawmakers the retirement system would find a suitable replacement and that he will be helping with the transition.
Thielen was named the permanent executive director of KRS in July 2012 after serving in the position on an interim basis for 15 months. It is unclear who will take the helm of the group.
The Public Pension Oversight Board also heard testimony on KRS investment performance, administrative activities, litigation costs, employee turnover, and statistics on active and retired membership.
Under enabling legislation passed in the 2015 Session, it was speculated that Kentucky Employers Mutual Insurance and the Council of State Governments will withdraw from the retirement system when the new law is effective.