Pension Recommendations Report From the PFM Group Is Now Available
PFM Group Consulting LLC is a firm hired by the Commonwealth of Kentucky to study the current and projected financial condition of the systems, and draw on best practices nationally to provide options and recommendations for improvement and reform.
The Group has already issued two Reports: "Report #1 Transparency and Governance," and "Report #2 Historical and Current Assessment." All Reports can be accessed on the Kentucky Pensions website: https://pensions.ky.gov/Pages/Consultant-Reports.aspx
The Recommendations contained in Report #3 build on The PFM Group's analysis of factors they detailed in Interim Report #2, addressing what they identify as "… the full range of causes for the current funding shortfalls." Accordingly, the Recommendations are organized under the following four (4) headings:
- Actuarial Assumptions
- Benefit levels and risk exposure
- Investment practices and approach
It is important to note that these are only recommendations from the consultant. Any changes to KRS would require legislative action, which can only occur when the General Assembly is in session. The Governor has the authority to call a Special Session at any time, and he has indicated he will do so to address pension issues sometime this fall, but no call has been issued yet.
KRS will notify you via this website and on social media accounts (Facebook, Twitter, etc.) when the Governor calls the General Assembly into Special Session.
Here are the Recommendations that pertain to Kentucky Retirement Systems. Recommendations for Kentucky Teachers' Retirement System and the Legislator/Judicial Retirement System are contained in the Report but are not listed here.
"Actuarial Method and Assumptions" Recommendations
1. Modify Kentucky statute KRS 61.565 to convert the level percent of payroll amortization method for KRS to a level dollar method.
The Report says, "This consistent approach to reducing the Commonwealth's long-term pension debt will substantially increase the likelihood of steady and meaningful progress toward regaining healthy funded status."
2. Maintain the current 30-year amortization periods beginning June 30, 2013 for KRS.
NOTE from The PFM Group's Report: With the significant shift in assumptions approved in May and July and the resulting escalation in required contributions in the near term, however, a reset period of 30 years under a new level dollar amortization could be considered to modestly smooth the fiscal impact as more prudent funding approaches come into place. Resetting the amortization period with a level dollar amortization would not shift disproportionate amounts of liability principal past the end of the current amortization period, as is the case when level percent of payroll amortization periods are reset – such as following 2013 SB 2. It is important to note, however, that resetting the amortization period is not an optimal practice, and could generate unfavorable actuarial results.
3. Adopt and maintain prudent and realistic investment return assumptions.
For KERS Non-Hazardous and SPRS, The PFM Group recommends investment return assumptions of 5.0 - 5.25%. For KERS Hazardous, CERS Non-Hazardous, and CERS Hazardous, The PFM Group recommends investment return assumptions of 6.0% - 6.25%. NOTE: In July 2017 the KRS Board of Trustees voted to adopt investment return assumptions of 5.25% for KERS Non-Hazardous and SPRS, and assumptions of 6.25% for KERS Hazardous and both CERS plans, so KRS has already proactively complied with this recommendation.
"Benefit levels and risk exposure" Recommendations
Benefit Recommendation Options – FUTURE HIRES
1. For KERS Non-Hazardous and CERS Non-Hazardous: Provide future hires with a 401(k) style defined contribution (DC) retirement benefit, with a mix of employer and employee contributions
The potential plan design would include:
- Mandatory employee contribution of 3% of salary
- Guaranteed base employer contribution of 2% of salary
- Employer match set at 50% of additional employee contributions up to 6% of salary (i.e., up to an additional 3% from the employer)
- Maximum employer contribution of 5% and total contribution of 14%
- Employer contributions would vest 100% after 5 years, and 50% after 4 years
2. For KERS Hazardous, CERS Hazardous, and SPRS participants, retain the current cash balance structure, modifying only the requirements for normal retirement eligibility to be age 60, with no provisions for retirement at any age based on years of service
Benefit Recommendation Options – CURRENT PLAN PARTICIPANTS
1. For KERS Non-Hazardous and CERS Non-Hazardous:
- Freeze accrued benefits under the applicable existing pension tiers
- An optional buyout for the actuarial value of accrued service, with the equivalent cash value to be rolled over to the plan participant's new DC account
- Eliminate the application of unused sick and compensatory leave to increase pension benefits
- Eliminate the portion of any pension benefit payments resulting from COLAs granted between 1996-2012 that were provided under statutes excluding such increases from any inviolable contract provisions
2. KERS Hazardous, CERS Hazardous, and SPRS participants would retain the primary benefit associated with their current Tier, modifying only the requirements for normal retirement eligibility to be age 60, with no provision for retirement at any age based on years of service
3. Retiree Medical/ Insurance Fund
- Pursue harmonization of the level of retiree healthcare benefits for KRS, LRP, and JRP non-Medicare and Medicare retirees so that the basic plan and benefit provided to the retirees is consistent with the LivingWell PPO coverage provided to active Commonwealth employees
- Limit retiree healthcare eligibility to employees retiring directly from Commonwealth service. The Report says this requirement would eliminate the ability of former employees who left public service early in their career (e.g. left at age 35 with 10 years of service), from collecting Commonwealth-subsidized retiree healthcare when they eventually reach the age for beginning to draw down their public pension
- Funding for all plans should be based on the Actuarially Determined Contribution (ADC)
- State-funded plans:
- Budget total amount based on the ADC
- Continue to allocate normal cost as percent of payroll
- Charge unfunded liability as a dollar amount based on the unfunded liability amortization associated with that employer's liability for accrued service
- CERS – consider caps/collars on Actuarially Determined Employer Contribution (ADEC) percent increases
"INVESTMENT PRACTICES AND APPROACH" RECOMMENDATIONS
- No official recommendation, but does suggest the possibility of consolidating the investment management functions of the three state-administered retirement systems (KRS, Kentucky Teachers' Retirement System, and the Legislators/Judicial Retirement System) into a single investment team.