Asset AllocationNovember 6, 2020

Kentucky Retirement Systems Leans into Stocks, Real Estate

Investment committee members are dialing up risk levels to meet return assumptions.

Reported by Sarah Min

The Kentucky Retirement Systems (KRS) will increase allocations to stocks and real estate investments across the group’s pension plans to meet return assumptions.

The KRS investment committee members unanimously approved the changes this week after hearing a presentation from Wilshire consultants who said the system’s five plans, which target returns of either 5.25% or 6.25%, would not meet assumptions otherwise.

“All of our asset class assumptions are generally down versus when we did this last time in 2018 for KRS,” Wilshire Associates’ Senior Vice President Chris Tessman said at the teleconferenced meeting. “So, when we think of the investor challenge, it makes it more difficult to get to your target rate of returns with the same current policy.”

Investment committee members doubled down on stocks and real estate assets, while boosting cash, too. They also decided to tamp down allocations to real return assets.

The Kentucky Employees Retirement System (KERS) and the State Police Retirement System (SPRS), which both target a 5.25% return, are among the nation’s lowest funded plans. Their asset allocations to cash have increased to 5%, up from 3% under the old policy. Meanwhile, real estate investments jumped to 10%, up from 5%. Growth asset allocations to US and non-US equities in KERS and SPRS will also increase to 16.25% each, up from 15.75%.

At the same time, real return allocations have fallen to 10%, down from 15%. Opportunistic investments will be tossed out altogether, down from 3%.

“I don’t believe our old investment policy as adopted was lacking broadly but it had some tweaks that needed to be made,” KRS Investment Committee Chair C. Prewitt Lane said during the meeting.

Trustees are also raising volatility risk in the remaining KRS Hazardous, County Employees Retirement System (CERS), and insurance plans, which all target a 6.25% return. Allocations to US and non-US equities jumped to 21.75% for each portfolio, up 3 percentage points from 18.75% under the old policy. Committee members are also increasing targets under the plans to cash and real estate, while reducing real return assets.

The KRS’ return assumptions rank among the lowest of the nation’s public pension systems, which have a median target of 7.25%. As of its most recent fiscal year, KRS is worth $18.2 billion, up 1.15% for the year.