kentucky retirement systems overview presented to the central kentucky aga september 12, 2013

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

TOTAL 117,589 8,784 2,331 189,006 16,467 334,177

5

TOTAL

107,353

139,352

87,472

Source: June 30, 2012 Comprehensive Annual Financial Report

KERS Non-Hazardous KERS Hazardous SPRS CERS Non-Hazardous CERS Hazardous

Active 41743 4007 904 83658 9040

Inactive 39338 2597 224 63280 1914

Retired 36508 2180 1203 42068 5513

10,000

30,000

50,000

70,000

90,000

110,000

130,000

150,000

170,000

190,000

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

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

8

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

Public Pension Fund Revenue Sources United States, 1982 to 2009

9

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.

In-vestments;

58%

Em-ployee

Contri-bu-tion

s; 14%

Em-ploy

er Contri-bu-tion

s; 28%

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

11

Summary of Actuarial Funding Level (2007 – 2012)


2007 2008 2009 2010 2011 2012

Actuarial 0.569 0.525 0.45 0.383000000000001 0.333000000000001 0.273

Market 0.609000000000001 0.499000000000001 0.336000000000001 0.318000000000001 0.317000000000001 0.262

5.0%

15.0%

25.0%

35.0%

45.0%

55.0%

65.0%

KERS Non-hazardous PENSION

Actuarial Basics

12



2007 2008 2009 2010 2011 2012

Actuarial 0.119 0.111 0.119 0.106 0.106 0.143

Market 0.128 0.106 0.081 0.0830000000000001

0.101 0.138

1.0%

3.0%

5.0%

7.0%

9.0%

11.0%

13.0%

15.0%

KERS Non-hazardous INSURANCE

Actuarial Basics

13



2007 2008 2009 2010 2011 2012

Actuarial 0.836000000000001 0.813 0.745000000000002 0.731000000000001 0.708000000000001 0.661000000000002

Market 0.914 0.784 0.577000000000001 0.645000000000002 0.708000000000001 0.635000000000002

5.0%

15.0%

25.0%

35.0%

45.0%

55.0%

65.0%

75.0%

85.0%

95.0%

KERS Hazardous PENSION

Actuarial Basics

14



2007 2008 2009 2010 2011 2012

Actuarial 0.498000000000001 0.532 0.614000000000002 0.637000000000002 0.651000000000002 0.899

Market 0.556 0.497000000000001 0.447 0.55 0.633000000000002 0.867000000000002

5.0%

15.0%

25.0%

35.0%

45.0%

55.0%

65.0%

75.0%

85.0%

95.0%

KERS Hazardous INSURANCE

Actuarial Basics

15



2007 2008 2009 2010 2011 2012

Actuarial 0.821 0.785 0.714000000000001 0.656000000000002 0.631000000000002 0.607000000000001

Market 0.873000000000002 0.744000000000002 0.547 0.57 0.625000000000002 0.588

5.0%

15.0%

25.0%

35.0%

45.0%

55.0%

65.0%

75.0%

85.0%

95.0%

CERS Non-hazardous PENSION

Actuarial Basics

16



2007 2008 2009 2010 2011 2012

Actuarial 0.288 0.326000000000001 0.396000000000001 0.409 0.466 0.638000000000002

Market 0.325000000000001 0.309000000000001 0.292 0.347 0.472 0.607000000000001

5.0%

15.0%

25.0%

35.0%

45.0%

55.0%

65.0%

CERS Non-hazardous INSURANCE

Actuarial Basics

17



2007 2008 2009 2010 2011 2012

Actuarial 0.742000000000002 0.729000000000001 0.679000000000003 0.655000000000002 0.622000000000002 0.581

Market 0.795 0.685 0.512 0.564 0.616000000000002 0.558

5.0%

15.0%

25.0%

35.0%

45.0%

55.0%

65.0%

75.0%

85.0%

CERS Hazardous PENSION

Actuarial Basics

18



2007 2008 2009 2010 2011 2012

Actuarial 0.312000000000001 0.347 0.409 0.414 0.468 0.607000000000001

Market 0.346 0.326000000000001 0.303 0.35 0.47 0.577000000000001

5.0%

15.0%

25.0%

35.0%

45.0%

55.0%

65.0%

CERS Hazardous INSURANCE

Actuarial Basics

19



2007 2008 2009 2010 2011 2012

Actuarial 0.637000000000002 0.598 0.548 0.497000000000001 0.45 0.401

Market 0.687000000000001 0.575000000000001 0.426 0.433 0.441 0.391000000000001

5.0%

15.0%

25.0%

35.0%

45.0%

55.0%

65.0%

75.0%

SPRS - PENSION

Actuarial Basics

20



2007 2008 2009 2010 2011 2012

Actuarial 0.266 0.279 0.339000000000001 0.279 0.282 0.373000000000001

Market 0.306 0.274 0.257 0.24 0.291 0.376000000000001

2.5%

7.5%

12.5%

17.5%

22.5%

27.5%

32.5%

37.5%

SPRS - INSURANCE

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

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KERS/SPRS 2012 Unfunded Liabilities

(in billions of dollars)

System Pension Insurance Combined Pension Insurance Combined

KERS Non-

Hazardous$8.26 $2.68 $10.94 $7.46 $3.82 $11.28

KERS Hazardous $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

22

Source: June 30, 2011 and June 30, 2012 Actuarial Valuations

2012 2011

CERS 2012 Unfunded Liabilities (in billions of dollars)

System Pension Insurance Combined Pension Insurance Combined

CERS Non-

Hazardous$3.59 $0.86 $4.45 $3.29 $1.64 $4.93

CERS Hazardous $1.26 $0.54 $1.80 $1.08 $0.88 $1.96

Total $6.65 $1.40 $6.25 $4.37 $2.52 $6.89

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Source: June 30, 2011 and June 30, 2012 Actuarial Valuations

2012 2011

What Caused the Increase in Unfunded Liabilities?

24

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

KERS Unfunded Liability Attribution

25Chart prepared by Cavanaugh & McDonald Consulting LLC

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

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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


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

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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

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KENTUCKY RETIREMENT SYSTEMSINVESTMENT PROGRAM

Transparency / Web Site Update

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• 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

http://www.kyret.ky.gov/

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

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Asset Allocation Targets (Effective January 1, 2013)

33

KRS Pension Fund - Asset Allocation

Asset Class Benchmark

Target Allowable Range

(+/- Target)KERS

KERS Hazardous

CERSCERS

HazardousSPRS

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%

Pension Asset Allocation Statistics

34

As of March 31, 2013

Fiscal and Calendar Year Pension Returns

35

KRS Pension Fund

Fiscal Year Return1990 11.67 1991 8.24 1992 11.67 1993 12.16 1994 1.02 1995 18.99 1996 17.63 1997 24.16 1998 20.76 1999 14.27 2000 6.41 2001 (5.41)2002 (4.30)2003 4.29 2004 13.58 2005 9.26 2006 9.68 2007 15.27 2008 (4.22)2009 (17.21)2010 15.78 2011 18.96 2012 0.14

2013 (to Mar) 11.40

KRS Pension Fund

Calendar Year Return1990 1.39 1991 21.79 1992 8.77 1993 7.40 1994 1.24 1995 26.91 1996 16.54 1997 23.27 1998 18.08 1999 14.08 2000 (2.69)2001 (3.31)2002 (6.81)2003 20.02 2004 10.92 2005 6.41 2006 13.98 2007 6.58 2008 (23.91)2009 19.66 2010 12.93 2011 (0.44)2012 12.88

2013 (to Mar) 4.01

Performance as of: March 31, 2013

36

March 2013Account / Group % Mgr Bmark Mgr Bmark Mgr Bmark Mgr Bmark Mgr Bmark Mgr Bmark Mgr Bmark

Total US Equities Less Equitization 20.6% 3.92 3.92 18.69 18.29 14.13 14.56 12.79 12.97 6.51 6.32 9.28 9.15 11.16 10.84 Equitization 0.0% - -- 30.12 -- 20.01 -- 14.15 -- (15.66) -- -- -- (6.02) --Total US Equities 20.6% 3.92 3.92 18.72 18.29 14.14 14.56 12.82 13.06 6.53 6.50 9.28 9.43 11.16 11.07

Total Non-US Equities (Less O verlay) 19.8% 0.47 0.25 18.21 17.55 8.51 8.87 4.00 5.03 1.00 0.30 10.00 10.50 2.17 2.71 Record Currency Management 0.0% -- -- -- -- -- -- -- -- -- -- -- -- -- --Total Non-US Equities (With O verlay) 19.8% 0.47 0.25 18.22 17.55 8.46 8.87 3.06 5.03 0.60 0.30 9.76 10.50 1.96 2.71

Total Emerging Market Equity 3.0% (0.96) (1.70) 14.79 12.15 7.24 2.30 -- -- -- -- -- -- 3.13 (3.14)

Total Equity 43.5% 1.95 1.74 18.32 17.45 11.23 10.91 8.09 8.64 3.83 3.24 8.93 8.98 10.88 10.71

Total Fixed Income 20.3% 0.46 0.12 5.74 2.67 7.98 4.72 7.93 6.23 6.04 5.52 5.51 5.36 8.25 7.98

Total Real Return 10.2% 0.39 0.51 5.21 3.71 7.60 4.51 -- -- -- -- -- -- 9.85 4.82

Total Absolute Return 10.2% 0.44 0.28 8.78 5.60 8.05 4.20 4.34 2.42 -- -- -- -- 4.34 2.42

Total Real Estate 2.9% 2.79 2.68 9.46 8.00 11.67 10.78 13.93 12.38 6.97 2.00 6.49 8.37 5.54 7.48

Total Private Equity 10.7% 1.57 1.58 7.79 6.24 14.17 21.05 13.19 11.36 3.87 7.98 12.02 9.28 10.99 -

Cash 2.2% 0.02 0.01 0.25 0.06 0.32 0.08 0.47 0.09 0.89 0.31 2.21 1.66 4.19 3.73

Total Pension Fund 100.0% 1.28 1.18 11.40 10.13 10.03 9.50 8.29 8.13 4.69 4.95 7.68 7.85 9.52 9.59

Absolute Return

Real Estate

Total Private Equity

Total Cash

Total Pension Fund

U.S. Equities

Non-U.S. Equities

Emerging Market Equities

Total Equity

Fixed Income

Real Return

Kentucky Retirement Systems - Pension Fund

Mar-13 FYTD 1 YR 3 YR 5 YR 10 YR Since Inception

Investment Allocation Examples

$ Plan Allocation $ Plan Allocation

KERS¹ - 0.0000% 7,520,000 18.2400%

KERSH² 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%

SPRS 1,690,000 2.1511% 1,500,000 3.6300%

Total 78,750,000$ 100.00% 41,250,000$ 100.00%

Note: The information above is presented based on the proposed contractual structure for the initial three years of the program.

Bay Hills Emerging Partners III Preliminary 2013 Plan Allocations

Pension Insurance

$ Plan Allocation $ Plan Allocation

KERS - 0.0000% 1,304,000 14.17%

KERSH 1,244,000 5.9811% 977,000 10.62%

CERS 14,569,000 70.0420% 4,245,000 46.14%

CERSH 4,540,000 21.8258% 2,306,000 25.07%

SPRS 447,000 2.1511% 368,000 4.00%

Total 20,800,000$ 100.00% 9,200,000$ 100.00%

Rubenstein Properties Fund II Plan AllocationsPension Insurance

Investment Allocation Examples (con’t)

Table A-3: Allocation Analysis Pension KERS $14,303,305 0.20%KERSH $2,549,616 0.50%CERS $28,704,773 0.40%CERSH $9,076,675 0.50%SPRS $1,265,631 0.60%Insurance KERS $2,324,444 0.50%KERSH $1,831,117 0.50%CERS $7,885,941 0.30%CERSH $4,362,222 0.50%SPRS $696,276 0.50%Sum Total $73,000,000 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.