Gov. Steve Beshear wants more people with investment experience added to the state's pension boards and regulations tweaked so that state pensions can diversify investment portfolios.
The move, announced Thursday, came after an independent report found that the state's pension systems — the Kentucky Teachers' Retirement System and the Kentucky Retirement Systems — had lost $5 billion over the past 10 years because they did not diversify their investments.
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The systems relied too heavily on investments in U.S. stock, said the report by Hammond Associates, a Missouri consulting firm.
The Kentucky Retirement Systems, which includes most state and county employees, has more than 330,000 current and retired employees.
The state teachers pension system covers roughly 115,000 employees.
The pensions face a combined potential $27 billion shortfall, or unfunded liability. That means both systems have money to cover current retirees but could fall short in future decades.
Beshear on Thursday made a series of recommendations to help diversify portfolio investments, including:
■ Adding four investment experts to the investment committee for each of the two pension boards.
■ Requiring all public pension board members to receive education on investment practices.
■ Reviewing regulations that may limit where the pension systems can invest their money.
The systems will immediately undergo a study to determine the best allocation of the pensions' money, according to a news release from the governor's office.
Mike Burnside, the executive director of the Kentucky Retirement Systems, said the system has already implemented almost all of the reforms Beshear has requested.
The retirement system has also fired some fund managers who under-performed and has moved some of its assets. The system is now in the top 25 percent of state pension systems of a similar size, Burnside said.
But its unfunded liability has grown slightly over the past year. Burnside said the liability is now just over $16 billion, up from $14.7 billion the year before.
Beaux Barnes, of the Kentucky Teachers' Retirement System, said the system welcomed the changes Beshear has proposed. The teacher pension's asset allocation has been determined by statute, making it difficult for the system to react to market changes.
Beshear's recommendations stem from a working group that has been studying the state's pension systems.
Finance and Administration Cabinet Secretary Jonathan Miller, chairman of the the pension reform group, said the changes will probably translate to better returns on employees' investments.