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Kentucky TRS: Reform at a Cost, Say Actuaries

By John Iekel • November 21, 2017 • 0 Comments
Kentucky Gov. Matt Bevin (R) on Oct. 18 unveiled a proposal to shift the Teachers’ Retirement System (TRS) in the Bluegrass State from the current defined benefit system to a defined contribution-based system. A recent actuarial analysis suggests the proposed changes to the retirement plan may not be a panacea.

Under Bevin’s proposal:

  • New teachers hired after July 1, 2018 and current teachers who have at least 27 years of service or are at least age 60 would be enrolled automatically in a defined contribution plan and/or a deferred compensation plan, and would have the same investment options as under the current system.

  • Participants will contribute a set amount of salary to the plan; the amounts vary based on whether they are university employees. Their employers will contribute as well.

  • When TRS participants retire, their benefits will be based on their account balances, which will be derived from employee and employer contributions to those accounts, as well as the returns on the participant’s investments.

  • The plan may offer annuitization of a member’s account balance through private companies.

  • Employee contributions and investment earnings on employee contributions will vest immediately; however, employer contributions and investment earnings on employer contributions will not vest until the employee has completed after five years of service.

The actuarial assessment, performed by Cavanaugh Macdonald Consulting LLC, concerns only the retirement plan and not the portion of the proposal that concerns retiree health benefits.

They base the projections on TRS’ estimated financial status on June 30, 2016. They conclude that during the first 15 years of a 20-year projection, the proposal would result in a decrease in liabilities due to suspension of cost-of-living adjustments for current and future retirees, there would be increases in liabilities due to a more conservative discount rate assumption and an expected increase in the number of active members retiring early. In addition, they say, there would be increases in contributions due to a change to the level dollar amortization methodology.

The analysts include some caveats, however. They note that the projections are based on TRS’ estimated financial status on June 30, 2016, and further that they project future events using only one of many possible sets of assumptions. They add that their projections do not predict TRS’ financial condition or its ability to pay benefits in the future and do not guarantee the DB plan’s future financial soundness.

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