Kentucky Retirement Systems, Frankfort, is changing the target asset allocations for its five pension funds with roughly $11.1 billion in assets combined and lowered the assumed rate of return for two of the plans, said David Peden, chief investment officer.
The five plans are the Kentucky Employees Retirement System hazardous and non-hazardous, County Employees Retirement System hazardous and non-hazardous and the State Police Retirement System.
The absolute-return target remained the same for all five funds at 10%, and the real-return target dropped two percentage points for all five funds to 8%.
Real estate remained at 5% for four of the five funds, while KERS’ non-hazardous real estate target was bumped up two percentage points to 5%, bringing it in line with the others.
Private equity remained at 10% for three of the funds— KERS hazardous and both CERS funds. Pending board approval, KERS non-hazardous and SPRS’ private equity targets will decline two percentage points each to 2% due to funded status and liquidity concerns. Officials didn’t feel it was prudent to have as much illiquid investments in those two plans going forward, Mr. Peden said.
Based on the new targets, the board also voted to lower its assumed rate of return for KERS non-hazardous and SPRS to 6.75% from 7.5%, which raises employer contributions and reduces the plans’ funding ratios. With the reduced outlook, the funding ratios for KERS non-hazardous and SPRS are now 17.7% and 31%, respectively, a 133-basis-point drop and 283-basis-point drop. Unfunded liabilities for KERS non-hazardous and SPRS increase 9.29% and 11.6%, respectively, to $10.94 billion and $542.07 million.
For KERS hazardous and both CERS funds, the U.S. equity and non-U.S. equity targets were revised to 26.5% each, all up 6.5 percentage points. For KERS non-hazardous, the U.S equity and non-U.S. equity targets will increase to 25% each, up three and five percentage points, respectively, pending board approval. For SPRS, the U.S. and non-U.S. equity targets will increase to 27% each, both up four percentage points, pending board approval.
A 4% emerging markets equity target for KERS hazardous, both CERS funds and SPRS was eliminated and with it, the underlying managers — Wellington Management, Aberdeen Asset Management and BlackRock — were terminated from the $261.4 million in total assets as of Oct. 31. KERS non-hazardous did not have an emerging markets equity target. Other parts of the portfolio still have some emerging markets exposure. However, investment officials wanted to move away from a dedicated emerging markets portfolio, Mr. Peden said. Along those same lines, Stone Harbor Investment Partners was removed as a dedicated emerging markets debt manager. It managed an $80 million portfolio as of Oct. 31.
Fixed income will now be broken out into global and credit. The previous breakout was core, high yield and global. Existing core managers will now fall under global fixed income and existing high-yield managers, credit. For KERS hazardous and both CERS funds, the new fixed-income targets are 6% each global and credit. The previous targets across all three funds were 9% core fixed income, and 5% each high-yield and global fixed income. For KERS non-hazardous, the revised targets are 12% credit and 10% global fixed income. The previous targets were 10% core and 5% each high yield and global. For SPRS, the new targets are 9% each credit and global. Previously, the targets were 8% core and 5% each high-yield and global.
The cash target remained at 3% for SPRS and remained at 2% for KERS hazardous and both CERS funds. For KERS non-hazardous, the cash target dropped two percentage points to 3%.