Pension expert says state’s 2013 reforms on the right track in three year check-up, some work remains

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IMG_0281Three years after major reforms were made to the Kentucky Retirement System (KRS) for new hires in 2013, Pew Center on the States’ pension expert David Draine returned to Kentucky at the invitation of the Kentucky Chamber with an analysis of the progress report of the changes which he says are on track to save the state and provide more stability to the pension system and its recipients.

The most extensive suggestions of the 2013 task force were to fully fund the state’s required contribution to the system, to avoid adding costs to the systems through items like unfunded cost of living adjustments and to adopt a modified defined contribution plan for future state hires.

The suggestions resulted in the pension reform legislation of the 2013 session, Senate Bill 2, which included moving new hires to a “hybrid” system in which the worker contributes 5 percent of his/her paycheck matched by the state and receives a guaranteed return on investment of 4 percent. The annual cost of living adjustment for retirees was also eliminated under the hybrid system for new hires.

Draine was quoted in 2013, saying the recommendations reached by the task force, which were strongly supported by the Kentucky Chamber, would be a “solid way forward” to solving the state’s pension crisis.

In addressing the Kentucky Chamber’s pension task force Wednesday, Draine said Pew’s evaluation of the reforms three years later show a positive path forward and added that he believes the system is now on the right track.

Draine noted that the state is now paying the full actuarially required contribution (ARC) to KRS and an amount over and above the ARC despite rising costs facing the state pension system. The Pew pension expert said this will continue to help the state get on a more stable track and shore up its retirement system.

The reforms, Draine said, have also resulted in more transparency from the system, but the state should keep pushing for more transparency, particularly in terms of investment costs, and continue its efforts to provide funds in excess of the ARC to address Kentucky’s unfunded pension liability.

As for the Kentucky Teachers’ Retirement System (KTRS), Draine said that while Pew did not look at that system while they were in the state three years ago, policymakers need to look at the data before making significant changes and understand that a new plan design does not solve the issue of unfunded liability for the system. He also noted that while approximately 94% of the ARC for KTRS was funded in the recently enacted budget, the challenge of fully funding the ARC remains.

According to projections by KTRS’ actuaries Draine cited in the meeting Wednesday, if no actions are taken and no reforms are made, KTRS will run out of money by 2039.

As changes to KTRS continue to be a topic of conversation in the state, Draine said any new plan for the teachers’ system needs to achieve retirement security while being fiscally responsible.

In terms of any future discussions for either system, Draine said Pew’s studies of pension systems from different states across the country have indentified,best practices related to the disclosure of investment costs which inclue:

• An investment policy that is available online

• Investment returns presented net of fees

• Investment returns presented by asset class

• A 20-year reporting method of investment returns

• Full reporting of investment fees

Members of the Kentucky Chamber’s pension task force asked numerous questions about Pew’s analysis, with some members expressing skepticism of KRS’s assumption of 6.75% returns in future years.

Along with presenting to the Chamber’s pension group, Pew experts also briefed members of the governor’s office and legislative leadership in meetings set up by the Kentucky Chamber.

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Jacqueline Pitts
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