Kansas’ public pension system’s portfolio suffers from COVID-19 market volatility

Alan Conroy, executive director of the Kansas Public Employees Retirement System, speaks Friday to the board of trustees before discussion of the system's 1.7% return on investment last fiscal year, well below the 7.75% target. (Tim Carpenter/Kansas Reflector)
Alan Conroy, executive director of the Kansas Public Employees Retirement System, speaks Friday to the board of trustees before discussion of the system's 1.7% return on investment last fiscal year, well below the 7.75% target. (Tim Carpenter/Kansas Reflector)

TOPEKA — The investment portfolio at the Kansas Public Employee Retirement System earned a fraction of the 7.75% return projected for last fiscal year, a consequence of economic challenges spawned by COVID-19, officials said Friday.

KPERS reported a return of 1.7% in the fiscal year ending June 30, which reflected a startling 11.7% loss during the third quarter of the fiscal year and the 9.7% gain in the final quarter as damaged markets began recovering.

The retirement system’s portfolio dwindled by $951 million during the six-month period ending June 30. The asset value of the trust fund rebounded by Aug. 31 to $21.57 billion, an amount surpassing the $21.19 billion asset value on Jan. 31.

“Uncertainty has certainly been the watch word,” said Elizabeth Miller, chief investment officer at KPERS. “The pandemic really overwhelmed everything. Lots of risks on the horizon, both domestically and internationally.”

Miller briefed trustees of KPERS during a meeting in Topeka that included observations on the state’s pension system by Allan Emkin, a consultant with Meketa Investment Group.

Emkin said the previous fiscal year was an extraordinary period because it contained the most rapid rise and decline in the equity market in modern history. When COVID-19 began sweeping the world, businesses were paralyzed and the stock market took a huge hit in March.

“An extraordinary level of volatility. That volatility continues to be driven by nonfinancial factors. We can only hope the health issues and financial issues get resolved sooner rather than later,” he said.

He echoed Miller’s conclusion that members of KPERS should be prepared for challenges as the pandemic flexes its muscle worldwide.

“To say that there is uncertainty would be a gross understatement,” Emkin said.

Miller said KPERS investments would be influenced by the actions of the Federal Reserve and Congress in terms of stimulus packages that have concentrated on millions of Americans thrown into unemployment. Negotiations with the White House and Congress stalled, but there is pressure to make a deal before the November elections.

Continuation of historically low interest rates will result in lower return on assets, she said. In addition, she said, a contributing issue to the puzzle is the ongoing election between President Donald Trump and Democratic nominee Joe Biden, a Democrat.

Officials at KPERS’ reported the 25-year investment return for the system was 7.8%, just above the 7.75% target.

KPERS administers three statewide defined-benefit retirement plans for state and local public employees, which includes the core system, a system for police and fire employees and a system for judges. There are 315,000 active, inactive and retired members of KPERS.

Employees, public employers and the state of Kansas contribute to the system, and investment return shortfalls eventually must be made up through contributions. KPERS has an unfunded actuarial liability of $9 billion, a result of two recessions and KPERS receiving less than the required employer contributions for more than 25 years.

In 2015, the Kansas Legislature approved the sale of $1 billion in bonds to finance investments in the market to eventually reduce the unfunded actuarial liability.