Kentucky Calls for Redo of TRS Pension Bill Analysis

Kentucky’s budget director is seeking a redo of Cavanaugh Macdonald’s analysis of the Teacher Retirement System (TRS) pension bill, after it reportedly said Gov. Matt Bevin’s reform plan would cost taxpayers an extra $4.4 billion over the next 20 years.

The reform proposal calls for shifting the pension participants from a defined benefit plan to a defined contribution plan. Cavanaugh Macdonald’s analysis said closing the defined benefit plan would require the TRS to alter its asset allocation and invest in more conservative options.

However, Bevin’s office said Cavanaugh Macdonald’s initial analysis of the current pension proposal uses assumptions that are very different from those in its annual valuation reports, including “significant changes” in retirement patterns and an investment return assumption “very different” from the rate recently approved by the TRS Board.

“It seems to me that your report is incomplete and non-compliant with your profession’s standards, as it did not include an explanation of the rationale,” wrote State Budget Director John Chilton in a letter to Cavanaugh Macdonald principals Edward Koebel and Cathy Turcot. “It did not include a reference to any studies or analyses that led to the change in assumptions, nor did it include a disclosure of the general effects of the change in retirement rates.”

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Chilton has asked Cavanaugh Macdonald to “rectify this deficiency” by explaining their rationale that:

All employees already eligible for the 27 years of service or age 60 with five years of service would retire at the end of the three-year extended period, during which those teachers would continue to benefit from the defined benefit provisions.

100% of active teachers with less than two years of service on July 1, 2018, will elect to participate in the new defined contribution plan.

All other employees who have more than two years of service but not yet eligible would immediately retire on meeting the threshold.

The governor’s office also said that although the statutes require a 20-year analysis, Chilton will request the analysis be extended to 30 years so that the long-term effects of the pension proposal can be modeled within the 30-year amortization period contained within the proposed legislation.

“In the past, a lack of realistic and rational actuarial assumptions helped obscure the distressed financial status of the plans and contributed to the long-term unsustainability of the plans,” said Chilton in a statement. “We will ask Cavanaugh Macdonald to prepare calculations with several alternative assumptions so that policy makers can make informed decisions based on scenarios that include realistic assumptions.”

Tags: Gov. Matt Bevin, Kentucky, Kentucky Teachers Retirement System (KTRS), Pension, Pension Reform

The California Public Employees’ Retirement System (CalPERS) is considering major changes to its investment portfolio structure as part of an asset liabilities review the pension does every four years. As CIO reported earlier this week, the changes could include a significant increase to fixed-income, or the pension could vote on a candidate portfolio that keeps the asset mix largely the same.

On Monday, pension board members, city officials, and members of the public gathered to consider four possible options for the portfolio. The meeting turned contentious during the comment period, which saw city officials, lobbyists, and citizens argue stridently for the status quo. Why? The core issue for CalPERS constituents isn’t the perennial “active versus passive” debate or whether investment fees are too high. Instead, employers in the system are concerned that any change in the pension’s funded status would force higher pension payments.

Of the four options, two portfolios would significantly increase CalPERS investments in fixed-income. One candidate portfolio raises fixed-income investments to as much as 44%, up from the current rate of 19%. While adding to safe-haven assets might seem like the kind of risk-averse maneuver participants would hope to see from a pension fund, it would also lower the target rate of return below the current 7% level. A lower rate of return would immediately lower the funded status of the pension system, meaning higher payments for employers.

A third option would increase the rate of return to 7.25%, but would take on more equities risk and could lead to increased funding costs down the road—especially in the event of a market correction. By the end of Monday’s workshop, employers in the system were lobbying heavily for “Candidate Portfolio C,” which tracks very closely with CalPERS’s current allocations and return assumptions. CalPERS’s asset mix is 50% global equities, 19% fixed-income, 9% real estate, 8% private equity and 2% infrastructure.

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Supporters of Portfolio C argue that the current trajectory would give employers crucial leeway on payments to avoid adding constraints to already tight budgets.

CalPERS is slated to vote on one of the four portfolios in December.

Board questions CalPERS private equity strategy, ramps up real assets

There were also hints during Monday’s board meeting and asset liabilities workshop that even if Portfolio C wins the day, CalPERS would be taking a closer look at its private equity investments.

Under both the current asset mix and Portfolio C, private equity would receive an 8% allocation. However, that 8% could go to more managers in the future. Several years ago, CalPERS pared back the number of private equity funds it invests in, opting for larger allocations to fewer managers. The goal of this strategy is to use bigger allocations as a carrot to get lower fees from GPs. Now, with the portfolio under the microscope, the approach may change in favor of greater diversification. CalPERS has directed pension consultants from Meketa Investment Group to reassess the private equity portfolio and make recommendations about how best to optimize allocations to the asset class.

Many pensions followed CalPERS’s decision to make larger allocations to fewer managers, leading to significant activity on the private equities secondaries market over the past four years. A shift back the other way could be significant for the dynamics of an already-frothy private equity market.

CalPERS is also planning to realign its real assets portfolio, bringing its investments in infrastructure and real estate under the real assets umbrella in the new portfolio.

In a taped comment following Monday’s meeting, Paul Mouchakkaa, CalPERS’ managing investment director of real assets said that the real assets portfolio “is increasingly meeting its role in the composite fund of CalPERS. Going forward, we hope to grow our infrastructure and real estate holdings and take on initiatives around ESG integration.”

Tags: CalPERS, Fixed-Income, Pension, Private Equity