FRANKFORT (Legislative Research Commission) — Retirees in the Kentucky Retirement Systems’ pension plans are expected to live longer which, along with less turnover among some active employees, will ultimately impact system costs, a state oversight committee heard in late April.
The new assumptions are part of the 2013-2018 KRS actuarial “experience study” shared with the Public Pension Oversight Board by Kentucky Retirement Systems Executive Director David Eager and Danny White, a consultant with the actuarial firm GRS which conducted the study. The study is required every five years by statute, with data from the recent study used to determine KRS contributions over the next three years.
White said longer life expectancy among retirees age 65 and older is a national trend due to various factors, including pharmacy benefits and other care.
“Once you get to retirement, that’s when your life expectancy is expected to improve” according to the latest assumption, said White.
Public Pension Oversight Board co-chair state Sen. Jimmy Higdon, R-Lebanon, asked White to explain what occurred in the past five years that led GRS to reach a new assumption for retiree life expectancy. White said the assumption is driven by both data and trends. The prior assumption, made around 2013, factored in a margin of growth for life expectancy based on different variables, White explained.
Higdon said he thinks some past assumptions about KRS may have helped to escalate the systems’ unfunded liability, which now totals at least $13.5 billion for the Kentucky Employees Retirement System non-hazardous plan alone.
“Those assumptions – payroll assumptions, return on investment assumptions—a lot of those assumptions were, I guess, artificially low in my opinion,” said Higdon.
White said that would require some review, saying, “You have to look at all the facts and circumstances at the time to say, whether or not, is that appropriate.”
Increased life expectancy won’t singularly impact cost to the retirement systems, White told the board. That cost, he said, is based on investment, employee turnover, and mortality, among other factors.
The new assumption for turnover – which occurs when an employee no longer contributes to KRS, or becomes an “inactive” member of KRS – of hazardous-duty employees in the County Employees Retirement System (CERS), specifically, shared by White indicates that turnover depends most often on an employee’s years of service and age.
“You can have high turnover early in the position but essentially, as they get five or six years in, more than likely they’re going to stay. They’re not going to leave the system,” said White.
That said, a decrease in turnover does necessarily translate to retirement from KRS. A significant number of CERS hazardous active employees “will not make it to retirement,” White said, although the new assumption expects less turnover in that system than in prior years, he said.
“That’s a cost increase,” said White. “It’s more expensive to provide retirement benefits than, let’s say, a termination benefit.”
Another recommendation made by GRS assumes a higher rate of salary change for some KRS members, along with an increased rate of disability for KERS and CERS members.
The current KRS experience study can be found here:https://apps.legislature.ky.gov/CommitteeDocuments/287/11932/4%2022%202019%202019%20KRS%20ExpStudy.pdf. The previous KRS experience study from 2008-2013, and a 2014 presentation of the study, can be found on the KRS website at: https://kyret.ky.gov/About/Board-of-Trustees/Pages/Experience-Studies.aspx