Market forces force KPERS to reduce assumed investment return to 7% from 7.75% previously
TOPEKA — The Kansas Public Employee Retirement System board bowed Friday to deteriorating market conditions by lowering the assumed rate of return on the investment portfolio to 7% and bringing the projection more in line with others significant estimates of the US public pension system.
The Kansas system’s 7.75% was the highest among comparable systems across the country, with the average for major pension plans pegged at 6.99%. KPERS consultants recommended that administrators reduce the annual projection to 6.75%. Poor investment performance since December has pushed the system’s real annual rate of return closer to 3%.
The KPERS board of directors, which has a fiduciary responsibility to make a reasonable return on investment assumption and to ensure that certain benefits have been paid, issued a statement indicating that the change would not affect the benefits received by the retirees. The statement assured members that “benefits are secure and unaffected”.
Some KPERS administrators and Republican legislative leaders were reluctant to lower the assumption because lowering the projection would inflate the unfunded liability. However, sticking to an unrealistic figure could force future generations of employers or KPERS members to pay significantly more to meet debts.
In April, Kansas Senate Speaker Ty Masterson and Senate Budget Chairman Rick Billinger told trustees they weren’t convinced it would be wise to lower the base assumption. The senators indicated that a mere 0.25% reduction would add $600 million to the long-term liability of the system.
In 2017, the KPERS rate of return was lowered by the administrators from 8% to 7.75%. The actual return of the KPERS portfolio has averaged 7.8% over the past 25 years.
Administrator Ryan Trader, a firefighter and paramedic with the Olathe Fire Department, said at the April board meeting that many observers were convinced that 7.75% was “far too high”. Other board members said professional investors were skeptical of the Kansas benchmark’s sustainability.
During the 2022 legislative session, lawmakers and Governor Laura Kelly approved a measure adding $1.125 million in state contributions to KPERS in an effort to improve the funded ratio of pension plans and reduce the short-term annual cost of employer contributions to the system.
For approximately two decades, KPERS faced a funding shortfall exacerbated by two economic recessions, insufficient membership or employee dues, and the state’s decision not to pay taxpayer-funded dues.