No easy fix for dire reality of underfunded pension system, experts tell Public Pension Oversight Board
There are no easy solutions for the funding issues facing the state’s retirement systems, according to experts testifying before the Public Pension Oversight Board Monday.
At a meeting of the pension group, members heard presentations from multiple groups including RV Kuhns, an investment firm which recently released a long-term study of the Kentucky Employee Retirement System non-hazardous plan.
The study, the details of which were first reported by Insider Louisville Reporter Joe Sonka, shows the bleak reality of the retirement system as the most underfunded in the country. The group also suggests in the study that there is “no available investment strategy that can significantly improve its financial status without significant risk of further depleting its assets.”
According to the findings, RVK states that with the assumption that investment returns are consistent at the expected 7.5 percent each year for the next 20 years and no additional changes to benefits and contributions occur in that time, the funding ratio would drop to 15 percent in coming years—an evaluation one percent higher than numbers discussed at the last meeting of the oversight board.
However, during the Monday meeting, it was stated by KRS officials that the system will likely not make the 7.5 percent target for their returns but instead would possibly only reach four percent.
The group also estimates that the actuarially required contributions—or ARC payments—are expected to jump from the current $500 million per year to $1.2 billion in 20 years.
As no new funding sources for the system are currently being discussed, the group based their findings solely on investment strategies and found KRS should diversify its investment portfolio but cautioned there is no real way for the system to bounce back through investments alone. From the Insider Louisville article:
While the most aggressive investment strategy, focused more on global and private equity, was estimated to have the most potential to rapidly increase the funding ratio of KERS — up to 82 percent in 20 years under the most ideal scenario — it also carried the greatest risk of financial collapse for the plan. Under the worst-case scenario, such a strategy could lead to a one-year loss of the majority of KERS assets, as well as an 8 percent chance of all assets being wiped out by 2034.
The most conservative investment strategy also fared poorly in the RVK estimate, as the KERS funding ratio would not eclipse 33 percent by 2034, even under the best-case scenario for investment returns.
The closest RVK comes to a conclusion on investments is that KERS should have a well-diversified portfolio that focuses on increasing liquidity — eschewing an ultra-conservative approach and recommending that any aggressive strategy not be undertaken without a full recognition of the risks involved. RVK does note that any positive outcome for the financial stability of the KERS plan is “extremely dependent on the contribution policy” set by Frankfort, and that even small changes to benefits policy could have a significant long-term impact.
As the article notes, the system’s current actuary Cavanaugh Macdonald studied the possible impact of a hypothetical $5 billion dollar bond by the state to shore up the system which showed KRS bouncing back with the influx in cash. However, according to Insider Louisville, Kentucky Retirement System Executive Director Bill Thielen has no plans to lobby the Kentucky General Assembly for such a proposal.
Meanwhile, Thielen told members at a previous meeting that the retirement system has hired Segal Consulting to conduct an actuarial audit, which was a suggestion of the Public Pension Oversight Board and will cost KRS $98,500.
On Monday, Segal Consulting Group gave a presentation to the oversight board about their processes for the actuarial audit and what their report will contain. In introducing Segal Consulting at the meeting, Thielen noted that the group previously served as the actuary for KRS from 2003-2005.
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 as well as other more in-depth investigations into KRS.
KRS has also contracted CEM Benchmarking to do administrative and investment benchmarking reports which should be underway soon to compare KRS to other systems, Thielen told the group Monday.
During the meeting, Thielen also informed members of the pension group that KRS has appointed a six member search committee after Thielen announced last month he will be retiring his position of executive director of the system at the end of the year. A national search firm will also be in place by the end of July to aid in finding the replacement, according to Thielen.
Kentucky Chamber President and CEO Dave Adkisson has sent a letter to the board of KRS outlining the qualities the business community would like to see in Thielen’s successor.