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By Sean Forbes
July 26 — Kentucky’s pension plan for state employees and retirees in nonhazardous positions—the most poorly funded state plan in the U.S.—still has holdings in worthless and declining thermal coal stocks.
The plan's continued holding in thermal coal stocks comes at a time when many pension funds for states and municipalities are preparing to dump their investments in coal.
The Kentucky Employees Retirement System’s coal investments are in bankrupt firms including Alpha Natural Resources, Arch Coal Co., James River Coal Co. and Walter Energy Inc., according to the plan's website, which includes a listing of its investments. The KERS plan also has investments in Cloud Peak Energy, Consol Energy and Westmoreland Coal Co.—all of which have had steep declines in their stock values over the past five years.
The KERS nonhazardous plan was 21.9 percent funded as of the end of 2015, according to a June 2016 report from the Center for State and Local Government Excellence. While the plan's investment in coal stocks is somewhat minimal, it raises questions about the plan's failure to take serious measures to shore up its investments.
The KERS plan covered more than 120,000 participants in 2015.
State and local government pensions that are planning to divest coal investments, and in some cases all fossil-fuel investments, cite climate change as well as fiduciary responsibility for their decision.
But the factor that matters most for a pension plan is returns on investments, not whether an industry may cause environmental damage or other social factors, Alicia H. Munnell, director of the Center for Retirement Research at Boston College, told Bloomberg BNA.
“Kentucky plans are in terrible shape, and I was dismayed to learn that the plan sponsor was holding stocks of coal companies,” Munnell said in a July 20 e-mail after Bloomberg BNA sent her the KERS holdings report.
So how did the KERS plan wind up with such poorly performing coal investments?
David Peden, KERS’ chief investment officer, told Bloomberg BNA July 22 that the plan’s investment manager uses an “enhanced index strategy,” which pegs investments to the Russell 2000 small-cap index.
The strategy is a top-down process in which the manager starts with all the stocks in the Russell 2000 and then cuts only companies that don't have a sustainable business model, Peden said.
“This enhanced strategy is strictly to reduce industries or companies that they don’t have a favorable view on, but they may not eliminate altogether,” he said.
By comparison, a bottom-up active management style is one in which “you’re strictly only buying companies that you have a strong view of” based on asset returns, he said.
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