Defined Benefit, Governance, Institutional Investors, Pension Funds, Public Funds, Uncategorized

Kentucky’s Pension Funding Ratio Tumbles; Fund Accelerates CIO Search

The assets-to-liabilities funding ratio of the Kentucky Retirement System (KRS) in Frankfort fell to 12.9% on June 30, from 13.6% earlier, according to a report to the system’s board by the fund’s actuaries last week.  Some at the fund expect the ratio to fall further before bottoming out. The pension fund had approximately $2 billion in assets and $15.6 billion in liabilities on June 30.  In an apparently separate action, the fund decided last week to move ahead with a search for a permanent chief investment officer. It was unclear at press time to what extent, if any, the two events were connected.

KRS is one of the most poorly funded state-level public pension plans in the U.S., largely due to many years of inadequate contributions by state leaders and unreasonable expectations about investment returns and payroll growth, according to local press reports.  Starting in Fiscal Year 2017, however, Kentucky Governor Matt Bevin and the state’s legislature has committed to fully paying the fund’s annual recommended contributions in the state budget.

It is possible the funding level for KRS could fall as low as 11% next year before rebounding and slowly, over several decades, climbing back up again, said KRS Board Chairman David Harris, according to local press reports. But that depends on future governors and legislatures sticking with the plan for full funding, Harris reportedly said.

The report by the fund’s actuary, GRS Retirement Consulting, said it is “imperative” that the main fund for most state government employees get a robust level of contributions,” local press reported. The actuary told the KRS board that its combined unfunded liability had grown to $23.6 billion as of June 30, up from $23.14 billion a year earlier.

Overall, KRS is responsible for providing pension and medical benefits for 372,524 active and retired public employees in Kentucky. It’s divided into three separate pension systems: the Kentucky Employees Retirement System (KERS) for state government employees, the  State Police Retirement System (SPRS) for Kentucky State Police and the County Employees Retirement System (CERS) for local government employees.

David Eager, executive director of KRS, said the decline in the funding level for the main state employee plan is due partly to the large number of retirements last year that worsened the problem of fewer employees paying into the plan and more retirees drawing benefits from it.

KRS has been absent a full-time CIO since the departure of David Peden in January 2017. Since then, Rich Robben, previously KRS’ deputy CIO and fixed-income director, has been serving as interim CIO.

Regarding the CIO search, Eager said, “The fact is we put out an RFP for a search firm several months ago. We had limited success with that, so we’re embarking on it [conducting the search] alone. The state requires we send out an RFP, which we did this past Monday, and which will close next Friday [Nov.16],” he said. He declined further comment on the recruitment, citing the fund’s policy of not commenting on personnel matters.

Peden took over as chief investment officer in 2013 after serving as KRS’ director of fixed income.  According to his LinkedIn page, Peden joined Mercer as a senior investment consultant, based in Greater St. Louis area, in September 2017.

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