We have recently received several questions about actuarial assumptions and the Quasi-Governmental Employers issue. A brief summary of the matter, as well as the process the Board of Trustees follows in making changes to the assumptions, should be helpful background information for our members to know.
In 2017 the Board of Trustees retained Milliman, a nationally known actuarial consulting firm, to conduct an economic assumptions audit of KRS' five pension and five insurance plans. Their main task was to determine if the economic assumptions in place at the time (e.g. inflation, investment return, and payroll growth) were accurately reflecting the actual experience and future expectations of the plans. Accuracy is important because these assumptions are used to determine the annual employer contribution rates used to fund current and future retiree benefits.
This analysis led the Board to conclude that the economic assumptions used for many years had been too optimistic, which in turn resulted in understating the plan's unfunded liabilities and required employer contributions. Further, adding to the problem was the General Assembly's failure to pay even these "optimistic" actuarially determined contributions for 15 years over a 22-year period to the KERS and SPRS plans.
During its May and July 2017 meetings the Board carefully considered the Systems' prior assumptions which contributed to the inadequate funded status of the plans. As a result, the Board voted to adopt more conservative assumptions largely in line with Milliman's recommendations. The Board believes these assumptions are vital to restoring the Systems to sound financial condition.
Please know that the Trustees did not make this decision in haste or without thorough discussion and debate. The Board has a fiduciary duty, per state law, to act solely in the interest of the members and beneficiaries of the Systems. Their actions, while fiscally painful, were absolutely critical in order to protect the current and future retirement benefits legally promised to more than 386,000 Kentuckians.
For additional information on this subject, you may want to read the Summer 2017 Pensions Insight newsletter article written by then-Board Chair John Farris titled, "KRS Board Takes Action on Economic Assumptions" found on the KRS website: https://content.govdelivery.com/attachments/KYRS/2019/05/03/file_attachments/1204797/8-23-17%20Pension%20Insights%20Summer%202017.pdf