Kentucky Retirement System’s Strategy to Get Legal Victory Against Agency

State Supreme Court opinion says Seven Counties owes KRS contributions.

In September, The Kentucky Retirement Systems (KRS) moved closer to a legal victory against Seven Counties Services, Inc., a quasi governmental agency that sought to avoid paying its employer contributions to the Kentucky Employees Retirement System (KERS) by filing for Chapter 11 bankruptcy protection. 

Kentucky’s Supreme Court issued an opinion that supported KRS’ legal argument that Seven Counties’ participation in, and its contributions to, KERS are based on a statutory obligation, not a contractual obligation, and therefore cannot be avoided.

KERS estimates that if Seven Counties is allowed to withdraw from the pension system, it will leave behind a shortfall of over $90 million, which it said would have to be paid by other employers in the pension system, and taxpayers.

In 1979, then Gov. Julian Carroll designated Seven Counties, a non-profit provider of mental health services, a department of the state government for the purposes of participating in KRS. It then paid into KERS to secure retirement benefits for its employees. However, because the rate of required employer contributions had increased sharply over the years, Seven Counties initiated bankruptcy proceedings in April 2013, primarily to reject its relationship with KERS as an executory contract, according to court documents.

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The bankruptcy court said that with the required contribution rate of 24% of wages, Seven Counties could either perform work toward its charitable mission, or pay its KERS contributions and be forced to terminate operations.

While KERS argued that that Seven Counties should be required to pay its employer contributions to the retirement system, the bankruptcy court determined that Seven Counties’ relationship with KERS was contractual. This meant that Seven Counties could reject the contract in bankruptcy and leave the retirement system. However, the state’s Supreme Court disagreed with this ruling, and said in an opinion that the contract between KERS and Seven Counties was statutory.

“The Kentucky General Assembly in unmistakable language identified the relationship between KERS and its members as an ‘inviolable contract,’” wrote Deputy Chief Justice Lisabeth Hughes in the court’s opinion.   “The statute by which employers join KERS contains no such contract language and implying it would violate both our plain language approach to statutory construction and Kentucky law regarding the limitations on a governor’s power.”

Hughes added that “the parties’ contemporaneous documentation contains not a hint of an intent to contract, leaving the theory with no support in either the facts or the law.”

The opinion went on to say that payments by an employer to KERS are essentially assessments, and are statutorily-imposed contributions to the KERS trust fund required of the employer in order for its employees to be members of KERS.

“The relationship between KERS and Seven Counties is and always has been purely statutory,” said the court.

The case now heads back to the Sixth Circuit Court of Appeals to resolve the remaining issues on appeal, which had been put on hold pending the state Supreme Court’s opinion.

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Baxter De-Risks $2.4 Billion in Pension Liabilities

Annuity contract with Prudential to transfer benefits for 17,200 members.

Health care company Baxter International has signed an agreement with Prudential to purchase a group annuity to transfer $2.4 billion in US pension plan liabilities, according to an SEC filing.

Under the terms of the agreement Baxter will purchase a non-participating single premium group annuity contract transferring the future benefit obligations and annuity administration for approximately 17,200 retirees and beneficiaries.

By transferring the obligations, Baxter said it will reduce its US pension plan liabilities by approximately $2.4 billion. The purchase of the group annuity will be funded directly by assets of the plan. The company said it doesn’t expect to make additional contributions to the plan prior to the closing of the de-risking transaction.

All transferred participants will continue to receive their pension benefits from the plan until Dec. 31, after which time Prudential will assume responsibility for making direct payment of the benefits. The transaction is expected to be completed by Oct. 11.

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Baxter also said it expects to recognize a non-cash pension settlement charge of approximately $750 million as a special item in the fourth quarter of 2019.

Buy-out sales have been subdued this year compared to 2018, according to data from the LIMRA Secure Retirement Institute.

US single-premium pension buy-out product sales were $4.74 billion in the second quarter 2019, which was down 42% compared with the second quarter of 2018 when there were $11.1 billion in buy-out sales.

However, despite sales figures being down from last year, the number of buy-out contracts has increased in 2019. According to LIMRA, there were 112 new buy-out contracts sold in the second quarter, which brought the first half 2019 total to 190, compared with 158 contracts sold in the first half of 2018.

Group annuity risk transfer sales in the second quarter were $5.8 billion, down 32% from the second quarter of last year, according to LIMRA data.

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