US - An audit of the Kentucky Retirement Systems (KRS) has cleared the fund of pay to play practices but uncovered "troubling aspects" regarding the use of placement agents.
The investigation, carried out by Kentucky State Auditor Crit Luallen, focused on specific questions raised by the media surrounding the use of placement agents at KRS.
It also examined the internal audit process, and a broad review of board policies and governance issues. It made 92 recommendations to strengthen the board of trustees' oversight and governance of the $13bn plan.
"Based on the information they reviewed, auditors saw no evidence of a "pay to play" scheme involving placement agents, or of conflicts of interest that benefited KRS officials; nor is there evidence that KRS incurred any additional cost through the use of placement agents," Luallen said.
"However, the audit points to several troubling aspects regarding the use of placement agents and will be referred to the US Securities and Exchange Commission (SEC). The SEC has the authority to determine if further investigation is needed in Kentucky."
The audit points out that one placement agent, New York-based Glen Sergeon, had an unusually close working relationship with former KRS chief investment officer Adam Tosh and received a high percentage of the system's investment contracts. He participated in seven of the 13 investment agreements in which placement agents were used, more than all the other agents combined, and made a significant amount of money in fees as a result, the audit found.
Tosh resigned in 2010, soon after internal auditors at KRS's questioned him about nearly $6m in fees paid to Sergeon in KRS deals.
"We followed up every issue that was raised and could not substantiate any specific evidence of wrong doing," Luallen added. "However, there were instances where the board could improve accountability, transparency and communication.
"There is not another public agency in Kentucky that has such a significant fiduciary responsibility affecting as great a number of people as the Kentucky Retirement System's board.
"To carry out this responsibility, these board trustees need to be highly qualified, adequately informed and fully engaged. Our recommendations offer significant steps KRS can take to strengthen board governance."
Key recommendations put forward by the audit included:
•That all information required by the Placement Agent Disclosure Policy be presented to the KRS Board of Trustees in a clear and transparent manner.
•That the Investment Committee receive more detailed information on recommended investments, including what steps were undertaken to locate the firms considered and all individuals or firms involved in identifying investment options and their services.
•That the Disclosure Statement include political contributions made to Kentucky officials within the past two years.
•That the General Assembly consider requiring the registration of placement agents as executive agency lobbyists with the Executive Branch Ethics Commission.
Luallen was also troubled by the audit into the financial viability of KRS.
"One overarching concern I want to emphasize is that the long-term viability of the retirement system has been dramatically impacted by the state's underfunding of its employer contributions since 2003," said Luallen.
"It is absolutely critical that future governors and legislatures honour the commitment in the 2008 pension reform legislation to continue to increase the employer contribution over the next 15 years to fully fund the retirement system's obligations," she added.
Because actuarially recommended contributions were not made in the state budget over the past decade, national studies have identified Kentucky as having one of the most troubled public employee pension funds in the country, the audit concluded.
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