active members and retirees be happy with their funding levels, since they exceed KERS-NH?? ANSWER: Absolutely, NOT!! There is a common misconception that pension funds that are 80% funded are healthy. It is assumed that the return on investments made by the various pension funds will outpace any demand for payment of retiree benefits. As the old adage states; when you assume you often make an ass out of u and me. It is currently common practice for pension funds to adopt an expected rate of return for the investments the fund managers make with the pension assets. KRS reduced the assumed annual rate of return to 5.25% for KERS-nh and 6.25% for CERS. In other words, over a long period of time (usually 20-30 years) it is assumed that investments will yield a 6.25 cents gain per year for every dollar of their investment for CERS and 5.25 cents for KERS. KRS action to lower the ROR is a step in the right direction . During the past 10 years the rate of return has been just 5%. Another likely cause for accepting 80% as a healthy level of funding for pensions is the federal legislation governing private pension funds. Defined benefit pension funds (all older Tier 1 KRS pensions are this type) have been in existence for many years. As problems with funds began to develop, there came a public outcry for government oversight of them. The Employee Retirement Income Security Act (ERISA) of 1974 was one of the first proactive efforts to reign in private pension abuses. ERISA was updated in 2006 with the passage of Pension Protection Act (PPA). Currently, private pension funds in trouble (i.e. underfunded and facing shortfall) are classified by the federal government. A fund which is between 65-79% funded is called endangered. A fund which is less than 65% funded is called critical condition. Private pension funds are obligated to submit a report on how they are dealing with underfunding when they become so classified. Just because you are not critical or endangered does not mean you are healthy!! Ideally, a healthy fund status is 100% funded. Keep in mind that ERISA and PPA do not apply to KRS, because KRS is a public fund. Many private funds collapsed when their corporate sponsors, like air line and automotive industries, filed for bankruptcy. As of now states may not file bankruptcy (cities like Detroit do file), but at least one Presidential candidate has gone on record as being in favor of amending the Constitution to allow states to file for bankruptcy.See article below on how states might use Federal bankruptcy law to escape pension and bond debts.
Hopefully, I have defined the problem and it is funding and an assumed rate of return which exceeds the actual 5% return rate. It is important to further understand HOW the KRS plans are funded. For an explanation of how our plans are funded click on the HOW navigation button on the top.
For a national perspective on too high assumed rate of return and general report on status of public pensions, click on the CNBC button state of public pensions.
It has been a common held belief that states could not use Federal bankruptcy law to avoid pavement on promised public pensions. There is increasing discussion on how states may seek relief from both bond holders and public retirees. Click these buttons for more information.
For an informed look at the assumed rate of return for pensions in in U.S. review this excellent article from Bloomberg. The article explains the results of setting the rate at too high a level. Click this button.
Defining the problem is always the first step in seeking the resolution to the situation. The Kentucky Retirement Systems (KRS) Annual Progress Report 2015-2016 list the funding ratios for retirement systems it manages. KRS reports on the status of funds for payment of pension benefits as well as status of funding for health care benefits. Pictured to the left are the percentages of funding available to send retirees their monthly benefits. For example, if you are a CERS-hazardous duty retiree, then KRS has on hand 48.1 cents for every $1 of promised pension payout benefit. All the funds are trending down. Funding for KERS-non hazardous is around 13.6%. KERS-NH is considered one of the worst publicly fund pension systems in the United States. Should CERS or SPRS
Kentucky Public Retirees identifies sources of underfunding of KY's pension plans by reviewing PFM, Kentucky's pension consultant, report. Must read for understanding on how we got here.
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Information provided by saveCERS.org is for educational purposes only and is not investment or legal advice.