By Chris Kenning
(Reuters) - A group of Kentucky state workers filed a lawsuit against state retirement system officials and three asset management firms on Wednesday, saying they breached fiduciary duties by embracing high-risk, high-fee investments that yielded lackluster returns.
Kentucky has one of the nation's most underfunded public pension funds, with nearly $16 billion in assets and a shortfall the suit estimates to be at least $27 billion.
The retirement and health benefits of 360,000 state workers, from police officers to janitors, depend on Kentucky's pension fund.
The lawsuit in Franklin Circuit Court seeks damages from KKR Prisma, Blackstone Group and PAAMCO for losses on investments they recommended. It also names several former or current Kentucky Retirement Systems officials as defendants.
Blackstone and KKR on Wednesday said the claims were baseless.
"The Blackstone fund referenced in the complaint delivered to the Kentucky Employees Retirement System positive returns outperforming relevant benchmarks," the group said in a statement.
"We take our fiduciary duty very seriously and believe that the allegations about our firm are meritless, misplaced and misleading," said a separate statement issued by KKR.
PAAMCO did not immediately comment on the lawsuit and Kentucky Retirement System officials could not be reached for comment.
Ann Oldfather, one of the attorneys representing the workers, said in an interview that the system suffered major losses in the 2000s. Desperate to bridge shortfalls, she said retirement officials were drawn into investing $1.2 billion in 2011 in high-risk hedge funds that carried high fees and were complex and difficult to monitor.
Lower-risk, simpler index fund investments would have been more suited for a pension fund, she said.
Retirement officials also used faulty assumptions for returns and did not sufficiently communicate the extent of the shortfalls, Oldfather said. That contributed to insufficient funding from the state legislature, the lawsuit seen by Reuters argues, citing comments from state lawmakers.
Kentucky's pension fund in 2001 was fully funded with a $2 billion surplus, the suit says, but is now in danger of failing with the largest of the plans having 13.6 percent of the money it needs.
Republican Governor Matt Bevin is pushing state lawmakers to overhaul the retirement system when they convene next month.
(Reporting by Chris Kenning; Editing by Tom Brown)