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PensionsFebruary 13, 2020

Kentucky Lawmakers to Make Honorable Transfer into Depleted State Retirement System

Legislators convene to align their interests with that of their constituents under the state’s ailing pension system.

Kentucky state lawmakers are advancing legislation that would ensure that 48 participants in the state’s Legislators Retirement Plan (LRP) elected since 2014, as well as any new legislators, begin participating in the Kentucky Employees’ Retirement System (KERS) for the duration of their legislative service. It would also eliminate a pension-increasing practice called “reciprocity” after July 1.

The law is intended to help align the interests of the state’s lawmakers with that of the state’s retirement plan, which is only 13% funded.

“I do believe that the legislators have to own the anxieties that our everyday people working in state government are living with,” said state Rep. Kelly Flood. “We’re joining everybody else, because it’s time.”

The remaining lawmakers elected before 2014 will see their benefits multiplier cut from 2.74% to 1.97%. The bill would also cut off certain avenues of funding to the LRP until its funded status is equivalent to or less than the KERS pension fund.

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Currently, the LRP is about 99% funded, and is expected to be 165% funded by 2039.

In contrast. KERS is grappling with a variety of situations that contest the viability and health of the fund in the foreseeable future.

One such issue is a potential funding “death spiral” that necessitates the state pension system to transfer from a so-called “percent-pay model” to a “liability-based model.”

“The death spiral is that the remaining employers have to pay a higher rate, which encourages more employers to cut back on their staff, that results in an even higher rate for the remaining, which results in even more cutbacks—it never ends,” a spokesperson for the retirement system told CIO.

“The solution is to take the aggregate liability and assign it to each individual employer, much like a mortgage, and they have a fixed payment over 24 years to pay it off,” the spokesperson said.

“This would be the exact set of events that led to the same under-funding situation with the other state plans,” said Donna Stockton-Early, executive director of the Kentucky Judicial Form Retirement System, which manages the legislative plan. “You’re just going to cost the commonwealth a lot more money in the long run.”

Tumbling Discount Rates Eat Away at Funded Ratios

Despite $14 billion investment gain in January, falling rates cause US corporate pension deficits to balloon.

By Michael Katz

A sharp drop in the discount rate in January has caused the funding deficit of the 100 largest corporate pension plans in the US to balloon by $73 billion, reducing the funded ratio for the plans to 85.7% from 89.0% for the month.

The funding decline is the result of a 35 basis point drop in the monthly discount rate, which fell to 2.85% from 3.20% in December, according to consulting firm Milliman, which tracks the plans through its Pension Funding Index (PFI)

The firm said it was the lowest rate recorded in the 20-year history of the PFI, and only the second time the PFI’s monthly discount rate has fallen below 3%. As a result, pension liabilities increased $87 billion in January, despite strong investment gains of $14 billion during the month. The investment gains increased the market value of the plans’ assets to $1.633 trillion at the end of January. However, at the same time, the projected benefit obligation (PBO), or pension liabilities, increased to $1.906 trillion at the end of January.

“Corporate pensions are now starting off the year trying to dig their way out of a hole created by January’s steep discount rate drop,” Zorast Wadia, author of the Milliman 100 PFI, said in a statement. “While much of the funding improvement from the fourth quarter of 2019 has been wiped out, there’s a silver lining in the strong investment returns experienced this month. Let’s hope that continues, with discount rates rising above 3% again.”

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Despite a 13% cumulative asset return for the pensions over the past 12 months, the Milliman 100 PFI funded status deficit has declined by $124 billion, and the discount rate has fallen 121 basis points to 2.85% as of Jan. 31 from 4.06% over a year ago.

Milliman said that under an optimistic forecast, which has interest rates rising to 3.40% by the end of 2020 and 4.00% by the end of 2021, combined with annual asset gains of 10.6%, the funded ratio of the plans would climb to 99% by the end of 2020 and 116% by the end of 2021. However, under a pessimistic forecast in which the discount rate falls to 2.30% by the end of 2020 and 1.70% by the end of 2021, combined with annual returns of only 2.6%, the funded ratio would decline to 80% by the end of 2020 and 73% by the end of 2021.