The stock market is up. Why did the KY state pension system only earn a 1.2% return?
The stock market is booming again, the S&P 500 is hitting record highs. How did Kentucky’s $18.2 billion state pension system fare on its investments for the past year?
Not so well.
Kentucky Retirement Systems this week disclosed an investment return of 1.2 percent on its investments for Fiscal Year 2020, which ended June 30.
That fell short of the median 3.59 percent return over the same period for peer pension plans as reported by Wilshire Associates, an investment advisory firm.
It also was far below the assumed rates of investment return that KRS relies on to balance its books. The assumed rate of return for the primary state government pension plan in KRS, which is possibly the nation’s worst-funded public pension plan, is 5.25 percent. For the better-funded primary local government plan, it’s 6.25 percent.
And it trailed the 5.8 percent investment return for the same period reported on Thursday by the $22 billion Teachers’ Retirement System of the State of Kentucky, which provides benefits for more than 140,000 public educators.
KRS could have done worse.
At the end of the fiscal year’s third quarter, on March 31, KRS’ investment return was about negative 7 percent because of the stock market crash that accompanied the arrival of the COVID-19 pandemic. The fourth quarter saved the day with market gains of greater than 8 percent.
Overall, KRS’ historic lack of funding is the big problem, the agency said in a statement on Monday.
With $25.8 billion in unfunded pension liabilities, KRS is forced to keep much of its money in short-term, conservative investments that don’t yield as much of a return, the agency said.
“KRS’ pension and insurance plans have fewer assets invested in equities than their peers, according to data from Wilshire,” KRS said. “That helps explain some of the under-performance KRS saw relative to its peers.”
However, sometimes KRS’ choices just didn’t do well.
For fiscal year 2020, for example, KRS’ U.S. equities portfolio produced a 4.7 percent return, below the 6.5 percent return of the Russell 3000 Index, one benchmark for the American stock market. Many of KRS “alternative investments,” such as hedge fund of funds, lost money for the year.
In litigation pending in Franklin Circuit Court, Kentucky Attorney General Daniel Cameron and a small group of public employees claim that KRS was cheated on up to $1.5 billion in hedge fund investments by several wealthy corporations, with blame to be shared by some of its own trustees and administrators.
The hedge funds produced “excessive fees … poor returns and ultimately losses,” saddling Kentucky with a crippling debt that should be repaid by the investment firms and their wealthy individual owners, one of the two lawsuits allege. The hedge funds were “extremely high-risk, secretive, opaque, high-fee and illiquid vehicles,” carrying risks not adequately disclosed to KRS officials, according to the suit.
KRS is responsible for providing retirement benefits for 386,711 past and present employees of state and local governments across Kentucky. The General Assembly voted last winter to let the local government pension fund separate from KRS and reorganize under its own governing board, although that action is still underway.
KRS is in such woeful shape because of many years of inadequate contributions by state leaders and unreasonably optimistic expectations about its investment returns and public payroll growth.
Its sources of revenue are contributions from the governments and their employees and returns on its invested assets. State lawmakers have diverted hundreds of millions of additional tax dollars into KRS since 2017 to restore it after nearly two decades of neglect, trying to protect the state pension fund from possible insolvency.
“Every year that the fund doesn’t meet the expected rate of return is another year that it falls further behind and puts more strain on the system. As a result unless the funds can catch up with better than expected performance the General Assembly will be forced to contribute a greater amount to the fund,” said state Sen. Wil Schroder, R-Wilder, co-chairman of the Public Pensions Working Group.
This story was originally published August 20, 2020 at 12:14 PM.
