KPERS mulls lowering investment return forecast

Trustees of the Kansas Public Employee Retirement System discussed Friday the possibility of following a national trend by lowering assumptions on long-term investment returns, signaling the state’s taxpayers could be asked to contribute more to a system serving 315,000 people.

Nothing is likely to be decided about modifying the current 7.75% return on investment standard for KPERS until completion in January of a lengthy study of economic and demographic trends.

“This is obviously one of the most important decisions the board makes,” said Kelly Arnold, the board’s chairman. “We need to make sure we’re making the right decision for the members.”

The assumed rate of return on investment for KPERS was lowered three years ago from 8% to 7.75%, but that seemingly modest adjustment increased the system’s unfunded liability by about $500 million. Whenever the unfunded liability climbs within KPERS, public employers would be expected to add funding to the system to keep pace with retiree obligations.

A survey conducted by the National Association of State Retirement Administrators indicated only 19 of 129 large retirement system plans used an investment return assumption above 7.5%. The same survey showed 112 pension plans tracked by NASRA reduced their investment return assumption in either fiscal year 2018 or 2019.

“It looks like a number of the peers have lowered their assumed rate of return. It’s still very early in our process here whether or not there will be a change or not. We’ll see how it plays out,” said Alan Conroy, executive director of KPERS.

KPERS has 315,000 members and the system manages approximately $20 billion in assets. For the first time in a quarter century, employers required to make contributions to KPERS have been meeting actuarial targets.

Brent Banister, with the Cavanaugh Macdonald Consulting firm hired by KPERS, told members of the board that if actual return on investment for the system was 1.1% lower over 10 years, as some analysts postulate, the accumulation of plan assets by the system would be $2 billion lower than assumed under the current 7.75% benchmark.

He said KPERS’ actual investment return was 6% during the past five years, 9.8% over 10 years, 6.4% over 20 years and 8.1% over 25 years.

“There’s a lot of variations on returns,” he said. “You can say, ‘The last five years have been 6%. We’re clearly doomed.’ Somebody says, ‘Yes, the last 10 years we’ve had 10 percent return. Things are optimistic.’”

Patrice Beckham, also of Cavanaugh Macdonald, said the board would take a deliberative approach, ideally producing an assumption on investment return that reflected the Kansas system’s portfolio strategy.

The target return for KPERS is evaluated every three years and the new figure wouldn’t be applied until May, she said.

“These assumptions impact the allocation of cost,” she said. “That’s the actuarial process of funding a pension plan. We tend not to be overly conservative or more aggressive, because this impacts members directly or indirectly as well as taxpayers. We’re trying to kind of shoot for middle ground when we’re looking at a range.”

Tim Carpenter, [email protected]