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Market forces compel KPERS to cut assumed investment return to 7%, down from 7.75%

By: - May 21, 2022 1:08 am
Trustees of the Kansas Public Employees Retirement System agreed to lower the anticipated annual rate of return on the system's portfolio to 7%, down from 7.75%, due to diminished market conditions. (Tim Carpenter/Kansas Reflector)

Trustees of the Kansas Public Employees Retirement System agreed to lower the anticipated annual rate of return on the system’s portfolio to 7%, down from 7.75%, due to diminished market conditions. (Tim Carpenter/Kansas Reflector)

TOPEKA — The Kansas Public Employee Retirement System’s board of trustees bowed to souring market conditions Friday by lowering the assumed rate of return for the investment portfolio to 7% and bring the projection more in line with other major U.S. public pension system estimates.

The Kansas system’s 7.75% had been the highest among comparable systems across the nation, with the average of large pension plans set at 6.99%. KPERS’ consultants recommended trustees shrink the annual projection to 6.75%. Harsh investment performance since December has pushed the system’s actual annual rate of return closer to 3%.

KPERS’ board, which has a fiduciary responsibility to make a reasonable investment return assumption and to make certain benefits were paid, released a statement saying the change wouldn’t alter benefits received by retirees. The statement assured members “benefits are safe and unchanged.”

There was reluctance among some KPERS’ trustees and Republican legislative leaders to lower the assumption, because slashing the projection would inflate the unfunded liability. However, sticking with an unrealistic figure could leave future generations of KPERS employers or members to pay much more to meet liabilities.

In April, Kansas Senate President Ty Masterson and Senate budget chairman Rick Billinger told trustees they weren’t convinced it would be wise to trim the baseline assumption. The senators indicated a mere 0.25% reduction would add $600 million to the system’s long-term liability.

In 2017, the rate of return on KPERS was lowered by trustees from 8% to 7.75%. The actual return on KPERS’ portfolio has averaged 7.8% over the past 25 years.

Trustee Ryan Trader, a firefighter and paramedic on the Olathe Fire Department, said during the board’s April meeting many observers were convinced 7.75% was “way too high.” Other members of the board said professional investors were skeptical the Kansas benchmark was sustainable.

During the 2022 legislative session, lawmakers and Gov. Laura Kelly approved a measure adding $1.125 billion in state contributions to KPERS in an effort to improve the funded ratio of pension plans and to reduce the near-term annual cost of employer contributions into the system.

For about two decades, KPERS has faced a funding shortfall inflamed by two economic recessions, insufficient employee contributions, and the state’s decision to skip taxpayer-funded contributions. KPERS is financed with contributions from both workers and employers, and the total amount of those deposits have fallen short in terms of meeting long-range liabilities to retirees.

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Tim Carpenter
Tim Carpenter

Tim Carpenter has reported on Kansas for 35 years. He covered the Capitol for 16 years at the Topeka Capital-Journal and previously worked for the Lawrence Journal-World and United Press International. He has been recognized for investigative reporting on Kansas government and politics. He won the Kansas Press Association's Victor Murdock Award six times. The William Allen White Foundation honored him four times with its Burton Marvin News Enterprise Award. The Kansas City Press Club twice presented him its Journalist of the Year Award and more recently its Lifetime Achievement Award. He earned an agriculture degree at Kansas State University and grew up on a small dairy and beef cattle farm in Missouri. He is an amateur woodworker and drives Studebaker cars.

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