Kentucky Retirement Systems Overview

Report
Kentucky Retirement Systems
Overview
Presented to the
Central Kentucky AGA
September 12, 2013
Kentucky Retirement Systems (KRS) Facts
• KRS administers retirement benefits for more than 334,000 state
and local government employees
– These employees include state employees, state police officers,
city and county employees, local agency employees, and
nonteaching staff of local school boards and regional universities.
• KRS administers three plans:
– Kentucky Employees Retirement System (KERS)
• KRS 61.510 to 61.705 and KY Administrative Regulations, Title 105
– County Employees Retirement System (CERS)
• KRS 78.510 to 78.852 and KY Administrative Regulations, Title 105
– State Police Retirement System (SPRS)
• KRS 16.505 to 16.652 and KY Administrative Regulations, Title 105
2
Plan Administration
• A thirteen-member Board of Trustees administers the
Systems:
–
–
–
–
Two trustees elected by KERS members
Three trustees elected by CERS members
One trustee elected by SPRS members
Six trustees appointed by the Governor
• One must be knowledgeable about the pension requirements on local governments
• Two must have at least 10 years of investment experience
• One each from lists of nominees submitted by the KY League of Cities, the KY Association of
Counties, and the KY School Boards Association
– The Secretary of the Kentucky Personnel Cabinet, ex officio
• The Board appoints an Executive Director to act as the Chief
Administrative Officer of the Board
• KRS reports for budget purposes to the Kentucky General
Assembly
3
Plan Administration
• The following standing committees are created in the bylaws of the
KRS Board of Trustees:
–
–
–
–
–
–
–
–
Administrative Appeals Committee
Disability Appeals Committee
Audit Committee
Investment Committee
Legislative and Budget Committee
Human Resources Committee
Retiree Health Committee
Legal, Compliance and Governance Committee
• The members and the chair of each standing committee are appointed
by the chair of the KRS Board of Trustees
• The chair of the KRS Board of Trustees or the Board may also create
ad hoc committees, as needed
4
KRS Membership by System and Status
As of June 30, 2012
200,000
180,000
160,000
140,000
120,000
100,000
80,000
60,000
40,000
20,000
0
TOTAL
KERS Non-Hazardous
KERS Hazardous
SPRS
CERS Non-Hazardous
CERS Hazardous
Retired
36,508
2,180
1,203
42,068
5,513
Inactive
39,338
2,597
224
63,280
1,914
107,353
Active
41,743
4,007
904
83,658
9,040
139,352
TOTAL
117,589
8,784
2,331
189,006
16,467
334,177
Source: June 30, 2012 Comprehensive Annual Financial Report
87,472
5
KRS Current Assets and Benefit Payments
• As of March 31, 2013 KRS assets were $14.7 billion
• KRS pays $2 billion in pension and insurance benefits
each year
– 95% of benefit payments are delivered to Kentucky residents and
have a significant impact on the Kentucky economy
Source: June 30, 2012 Comprehensive Annual Financial Report
6
How is KRS Funded?
• There are three (3) sources of funding for Kentucky
Retirement Systems:
– Employee Contributions:
• Set by statute
– Employer Contributions:
• Set annually by the KRS Board of Trustees based on an
independent actuarial valuation and recommendation
– Return on Investments
• The KRS Investment Committee has the authority to make
investment decisions and hire external investment managers and
consultants
• KRS utilizes internal investment staff, external investment
managers, and independent investment consultants to conduct
the investment program
7
How is KRS Funded?
The Majority of KRS Funding Comes from Return on Investments
Employee
12%
Employer
20%
Investment Income
68%
NOTE: These figures were calculated using only the PENSION fund data found in the June 30, 2011
Comprehensive Annual Financial Report
8
Public Pension Fund Revenue Sources
United States, 1982 to 2009
Employer
Contributions,
28%
Investments, 58%
Employee
Contributions,
14%
Sources: US Census Bureau and the National Association of State Retirement Administrators
(NASRA Issue Brief: Public Pension Plan Investment Returns, published October 2011).
The US Census Bureau first began reporting public pension fund revenue data in 1982.
9
Actuarial Basics
• Funding Level
– Ratio of Actuarial Assets to Actuarial Liabilities
– Measure of the plan’s financial soundness
– Provides a “snapshot” of the plan’s ability to meet
liabilities (benefits) earned to date
– Actuarial funding level is based on a 5-year
smoothing method
10
Actuarial Basics
Summary of Actuarial Funding Level (2007 – 2012)
KERS Non-hazardous PENSION
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
2007
2008
2009
2010
2011
2012
Actuarial
56.9%
52.5%
45.0%
38.3%
33.3%
27.3%
Market
60.9%
49.9%
33.6%
31.8%
31.7%
26.2%
Source: June 30, 2012 Comprehensive Annual Financial Report
11
Actuarial Basics
Summary of Actuarial Funding Level (2007 – 2012)
KERS Non-hazardous INSURANCE
16.0%
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
2007
2008
2009
2010
2011
2012
Actuarial
11.9%
11.1%
11.9%
10.6%
10.6%
14.3%
Market
12.8%
10.6%
8.1%
8.3%
10.1%
13.8%
Source: June 30, 2012 Comprehensive Annual Financial Report
12
Actuarial Basics
Summary of Actuarial Funding Level (2007 – 2012)
KERS Hazardous PENSION
100.0%
90.0%
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
2007
2008
2009
2010
2011
2012
Actuarial
83.6%
81.3%
74.5%
73.1%
70.8%
66.1%
Market
91.4%
78.4%
57.7%
64.5%
70.8%
63.5%
Source: June 30, 2012 Comprehensive Annual Financial Report
13
Actuarial Basics
Summary of Actuarial Funding Level (2007 – 2012)
KERS Hazardous INSURANCE
100.0%
90.0%
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
2007
2008
2009
2010
2011
2012
Actuarial
49.8%
53.2%
61.4%
63.7%
65.1%
89.9%
Market
55.6%
49.7%
44.7%
55.0%
63.3%
86.7%
Source: June 30, 2012 Comprehensive Annual Financial Report
14
Actuarial Basics
Summary of Actuarial Funding Level (2007 – 2012)
CERS Non-hazardous PENSION
100.0%
90.0%
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
2007
2008
2009
2010
2011
2012
Actuarial
82.1%
78.5%
71.4%
65.6%
63.1%
60.7%
Market
87.3%
74.4%
54.7%
57.0%
62.5%
58.8%
Source: June 30, 2012 Comprehensive Annual Financial Report
15
Actuarial Basics
Summary of Actuarial Funding Level (2007 – 2012)
CERS Non-hazardous INSURANCE
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
2007
2008
2009
2010
2011
2012
Actuarial
28.8%
32.6%
39.6%
40.9%
46.6%
63.8%
Market
32.5%
30.9%
29.2%
34.7%
47.2%
60.7%
Source: June 30, 2012 Comprehensive Annual Financial Report
16
Actuarial Basics
Summary of Actuarial Funding Level (2007 – 2012)
CERS Hazardous PENSION
90.0%
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
2007
2008
2009
2010
2011
2012
Actuarial
74.2%
72.9%
67.9%
65.5%
62.2%
58.1%
Market
79.5%
68.5%
51.2%
56.4%
61.6%
55.8%
Source: June 30, 2012 Comprehensive Annual Financial Report
17
Actuarial Basics
Summary of Actuarial Funding Level (2007 – 2012)
CERS Hazardous INSURANCE
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
2007
2008
2009
2010
2011
2012
Actuarial
31.2%
34.7%
40.9%
41.4%
46.8%
60.7%
Market
34.6%
32.6%
30.3%
35.0%
47.0%
57.7%
Source: June 30, 2012 Comprehensive Annual Financial Report
18
Actuarial Basics
Summary of Actuarial Funding Level (2007 – 2012)
SPRS - PENSION
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
2007
2008
2009
2010
2011
2012
Actuarial
63.7%
59.8%
54.8%
49.7%
45.0%
40.1%
Market
68.7%
57.5%
42.6%
43.3%
44.1%
39.1%
Source: June 30, 2012 Comprehensive Annual Financial Report
19
Actuarial Basics
Summary of Actuarial Funding Level (2007 – 2012)
SPRS - INSURANCE
40.0%
35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
2007
2008
2009
2010
2011
2012
Actuarial
26.6%
27.9%
33.9%
27.9%
28.2%
37.3%
Market
30.6%
27.4%
25.7%
24.0%
29.1%
37.6%
Source: June 30, 2012 Comprehensive Annual Financial Report
20
Actuarial Basics
• Unfunded Actuarial Liability (UAL)
– Difference between current value of assets and
liabilities
– Represents liabilities on benefits already earned by
employees and retirees
– UAL is amortized over a 30 year or shorter period,
much like a home mortgage
– The amortized payment is a part of the employer
contribution rate
21
KERS/SPRS 2012 Unfunded Liabilities
(in billions of dollars)
2012
2011
Pension
Insurance
Combined
Pension
Insurance
Combined
$8.26
$2.68
$10.94
$7.46
$3.82
$11.28
$0.26
$0.04
$0.30
$0.21
$0.18
$0.39
SPRS
$0.39
$0.21
$0.60
$0.35
$0.32
$0.67
TOTAL
$8.91
$2.93
$11.84
$8.02
$4.32
$12.34
System
KERS
NonHazardous
KERS
Hazardous
Source: June 30, 2011 and June 30, 2012 Actuarial Valuations
22
CERS 2012 Unfunded Liabilities
(in billions of dollars)
2012
System
2011
Pension
Insurance
Combined
Pension
Insurance
Combined
$3.59
$0.86
$4.45
$3.29
$1.64
$4.93
$1.26
$0.54
$1.80
$1.08
$0.88
$1.96
$6.65
$1.40
$6.25
$4.37
$2.52
$6.89
CERS
NonHazardous
CERS
Hazardous
Total
Source: June 30, 2011 and June 30, 2012 Actuarial Valuations
23
What Caused the Increase in Unfunded Liabilities?
1.
Reductions to Employer Contribution Rates in KERS and SPRS
•
$2.86 billion contribution shortfall over the past 20 years
2.
Cost Inflation for Retiree Insurance
3.
GASB 43/45
4.
Benefit Enhancements
5.
Retiree COLA increases not pre-funded
6.
2000-2002 and 2008-2009 Market Losses
24
KERS Unfunded Liability Attribution
Chart prepared by Cavanaugh & McDonald Consulting LLC
25
What Action Has Already Been Taken
to Address These Issues?
2004 Changes:
– Employees hired on or after July 1, 2003 earn health insurance
benefits based upon dollar value
• Non-Hazardous: $10/month for each year of actual service
• Hazardous: $15/month for each year of actual service
– Purchases
• Purchases after 8/1/2004 do not count towards vesting for health
insurance benefits
• Purchases made by new hires after 8/1/2004 will not count
towards vesting for retirement eligibility
• Purchase factor methodology reviewed and amended in 2005
26
What Action Has Already Been Taken
to Address These Issues?
2006 Actuarial Experience Study:
– Modified actuarial assumptions related to retiree health
premium increases, retirement rates, and life
expectancies will increase rates
– Eventually, GASB 43/45 and changes in actuarial
assumptions (including the expected continuation of
retiree health premium inflation) and COLAs will
exceed changes made to stabilize rates
27
What Action Has Already Been Taken
to Address These Issues?
2008 Changes:
•
House Bill 1 (2008 Special Session) made significant changes to retirement
benefits for employees who begin participating with KRS on or after September
1, 2008
•
HB 1 also had provisions affecting current employees and retirees
– COLA at 1.5% instead of based on CPI-U
– Service Purchase costs now include COLA and are calculated on earliest retirement date
member can retire with an unreduced benefit
– Retired/reemployed changes for employees returning to work on or after September 1,
2008 regardless of the employee’s retirement date
•
HB 1 amended KRS 61.565 to create a phase-in schedule for paying 100% of
the Actuarially Required Contribution rates
– If the General Assembly adheres to the schedule, all participating agencies will be
required to pay the full employer contribution by 2025
28
Senate Bill 2 (2013)
• Funding Provisions
– 100% of Actuarially Required Contribution (ARC)
for KERS and SPRS beginning FY 2015
– No COLAs unless: 1) Pre-funded; 2) KRS
determines plan surplus so that COLA will not
reduce funding below 100%
– Pension Spiking Prohibited
– Hybrid Cash Balance Plan
KENTUCKY RETIREMENT SYSTEMS
INVESTMENT PROGRAM
30
Transparency / Web Site Update
• Address: www.kyret.ky.gov
• Information available:
Latest Investment Performance Information and News
Consultant Reports (new)
Board and staff contact info
5 years of Comprehensive Annual Financial Reports
5 years of Annual Financial Statements
5 Years of Audits
Corporate Documents and Policies
Committee Assignments
Board and Committee Meeting Dates, Agendas, and Minutes
Investment Holdings and Commissions
Sections for Actives and Retirees
……. and more
31
Staff Educational Qualifications (10 staff)
•
Traditional Education – Advanced Degrees
– 7 MBA’s
– 2 MS Finance
•
Industry Certifications
– 2 Chartered Financial Analyst (CFA) Charter holder
• 3 CFA Candidates (6 covered by CFA Code of Ethics)
– 4 Chartered Alternative Investment Analysts (CAIA)
• 1 CAIA Candidate
– 1 Certified Treasury Professional (CTP)
• 1 CTP Candidate
– 1 Financial Risk Manager (FRM)
• 1 Financial Risk Management Candidate
Designations previously held: Licensed International Financial Analyst (LIFA), 6,7,63,65, Life and Annuity, Chartered
Mutual Fund Counselor
32
Asset Allocation Targets
(Effective January 1, 2013)
KRS Pension Fund - Asset Allocation
Target
Asset Class
Benchmark
KERS
KERS
Hazardous
CERS
CERS
Hazardous
SPRS
Allowable
Range
(+/- Target)
US Equity
Russell 3000
22.0%
20.0%
20.0%
20.0%
20.0%
5.0%
Non US Equity
MSCI ACWI Ex-US Standard
20.0%
20.0%
20.0%
20.0%
20.0%
5.0%
Emerging Market
MSCI Emerging Markets
0.0%
4.0%
4.0%
4.0%
4.0%
2.0%
Core Fixed Income
Barclays US Aggregate
10.0%
9.0%
9.0%
9.0%
9.0%
3.0%
High Yield Bonds
Barclays US High Yield
5.0%
5.0%
5.0%
5.0%
5.0%
2.0%
Global Bonds
Barclays Global Agg
5.0%
5.0%
5.0%
5.0%
5.0%
2.0%
Real Estate
NCREIF ODCE
3.0%
5.0%
5.0%
5.0%
5.0%
3.0%
Absolute Return
HFRI Diversified FOF
10.0%
10.0%
10.0%
10.0%
12.0%
3.0%
Real Return
CPI + 300 bps
10.0%
10.0%
10.0%
10.0%
10.0%
3.0%
Private Equity
Russell 3000 + 400 bps (lagged)
10.0%
10.0%
10.0%
10.0%
7.0%
5.0%
Cash
Cit Grp 3-mos Treasury Bill
5.0%
2.0%
2.0%
2.0%
3.0%
2.0%
33
Pension Asset Allocation Statistics
As of March 31, 2013
34
Fiscal and Calendar Year Pension Returns
KRS Pension Fund
KRS Pension Fund
Fiscal Year
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013 (to Mar)
Return
11.67
8.24
11.67
12.16
1.02
18.99
17.63
24.16
20.76
14.27
6.41
(5.41)
(4.30)
4.29
13.58
9.26
9.68
15.27
(4.22)
(17.21)
15.78
18.96
0.14
11.40
Calendar Year
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013 (to Mar)
Return
1.39
21.79
8.77
7.40
1.24
26.91
16.54
23.27
18.08
14.08
(2.69)
(3.31)
(6.81)
20.02
10.92
6.41
13.98
6.58
(23.91)
19.66
12.93
(0.44)
12.88
4.01
35
Performance as of: March 31, 2013
Kentucky Retirement Systems - Pension Fund
March 2013
Account / Group
Total US Equities Less Equitization
Equitization
Total US Equities
Total Non-US Equities (Less O verlay)
Record Currency Management
Total Non-US Equities (With O verlay)
Total Emerging Market Equity
Total Equity
Total Fixed Income
Total Real Return
Total Absolute Return
Total Real Estate
Total Private Equity
Cash
Total Pension Fund
FYTD
1 YR
Bmark
Mgr
Bmark
U.S. Equities
20.6% 3.92
3.92 18.69
18.29 14.13
14.56
0.0%
-30.12 -20.01 -20.6% 3.92
3.92 18.72
18.29 14.14
14.56
Non-U.S. Equities
19.8% 0.47
0.25 18.21
17.55
8.51
8.87
0.0% ------19.8% 0.47
0.25 18.22
17.55
8.46
8.87
Emerging Market Equities
3.0% (0.96)
(1.70) 14.79
12.15
7.24
2.30
Total Equity
43.5% 1.95
1.74 18.32
17.45 11.23
10.91
Fixed Income
20.3% 0.46
0.12
5.74
2.67
7.98
4.72
Real Return
10.2% 0.39
0.51
5.21
3.71
7.60
4.51
Absolute Return
10.2% 0.44
0.28
8.78
5.60
8.05
4.20
Real Estate
2.9% 2.79
2.68
9.46
8.00 11.67
10.78
Total Private Equity
10.7% 1.57
1.58
7.79
6.24 14.17
21.05
Total Cash
2.2% 0.02
0.01
0.25
0.06
0.32
0.08
Total Pension Fund
100.0% 1.28
1.18 11.40
10.13 10.03
9.50
%
Mar-13
Mgr Bmark
Mgr
Mgr
3 YR
Bmark
12.79
14.15
12.82
12.97
-13.06
4.00
-3.06
5 YR
Bmark
6.51
6.32
(15.66) -6.53
6.50
5.03
--
--
Mgr
1.00
--
5.03
--
0.30
--
0.60
--
0.30
--
Mgr
10 YR
Bmark
9.28
--
9.15
--
9.28
9.43
10.00
-9.76
--
--
--
Since Inception
Mgr
Bmark
11.16
10.84
(6.02) -11.16
11.07
10.50
2.17
--
10.50
2.71
--
1.96
2.71
3.13
(3.14)
8.09
8.64
3.83
3.24
8.93
8.98
10.88
10.71
7.93
6.23
6.04
5.52
5.51
5.36
8.25
7.98
--
--
--
--
--
--
9.85
4.82
--
--
--
--
4.34
2.42
4.34
2.42
13.93
12.38
6.97
2.00
6.49
8.37
5.54
7.48
13.19
11.36
3.87
7.98
12.02
9.28
10.99
-
0.47
0.09
0.89
0.31
2.21
1.66
4.19
3.73
8.29
8.13
4.69
4.95
7.68
7.85
9.52
9.59
36
Investment Allocation Examples
Bay Hills Emerging Partners III Preliminary 2013 Plan Allocations
Pension
$
KERS¹
Insurance
Plan Allocation
-
$
Plan Allocation
0.0000%
7,520,000
18.2400%
4,710,000
5.9811%
4,170,000
10.1000%
CERS
55,160,000
70.0420%
18,210,000
44.1500%
CERSH
17,190,000
21.8258%
9,850,000
23.8800%
1,690,000
2.1511%
1,500,000
3.6300%
78,750,000
100.00%
41,250,000
100.00%
KERSH²
SPRS
Total
$
$
Note: The information above is presented based on the proposed contractual structure for the initial three years of the program.
Rubenstein Properties Fund II Plan Allocations
Pension
$
KERS
CERS
CERSH
SPRS
Total
Plan Allocation
-
KERSH
$
Insurance
$
Plan Allocation
0.0000%
1,304,000
14.17%
1,244,000
5.9811%
977,000
10.62%
14,569,000
70.0420%
4,245,000
46.14%
4,540,000
21.8258%
2,306,000
25.07%
447,000
2.1511%
368,000
4.00%
20,800,000
100.00%
9,200,000
100.00%
$
Investment Allocation Examples (con’t)
Table A-3: Allocation Analysis
Pension
KERS
KERSH
CERS
CERSH
SPRS
Insurance
KERS
KERSH
CERS
CERSH
SPRS
Sum Total
$14,303,305
$2,549,616
$28,704,773
$9,076,675
$1,265,631
0.20%
0.50%
0.40%
0.50%
0.60%
$2,324,444
$1,831,117
$7,885,941
$4,362,222
$696,276
$73,000,000
0.50%
0.50%
0.30%
0.50%
0.50%
0.10%
Investment Expense Allocations
All investment management costs are allocated at the individual manager
level and are therefore only paid by a system, or the systems, that have
an allocation to that specific investment manager.
As each Retirement Plans ownership percentage of every underlying
manager is known, when investment management fees are paid from the
individual account, each plan pays only their proportionate share.
Administrative expenses are allocated based on each plans individual
membership count divided into the total KRS member count and is
changed on an annual basis.

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