Police & Fire Retirement Fund board narrows policy, adopts modest derisking with U.S. bias after Callan presentation

The Lexington Fayette Urban County Government Police and Fire Retirement Fund Board on Aug. 13 voted to change its target asset allocation, adopting Callan Associates— recommended Mix 2 with a modest U.S. equity bias after a multi-hour presentation and discussion of asset-liability modelling and manager structure.

The board heard Callan—s 2025 asset-liability study and an international-equity structure review delivered by Callan—s John Perron and Jim O—Connor. Callan modeled the plan with the fund—s current actuarial inputs and projected that the fund, currently about 73% funded, would reach roughly 90% funded over the next decade under the existing policy. Callan recommended a modest increase in core fixed income — on the order of 4 to 5 percentage points — to improve downside protection without materially reducing expected long-term returns.

Why it matters

The fund has more than $1 billion in assets and supports retired and active public-safety employees. Asset-allocation decisions are the largest determinant of the fund—s long-term investment performance and risk profile. Callan—s models used probabilistic simulations (2,000 draws) and showed that shifting modestly toward fixed income could lower the portfolio—s downside outcomes while keeping expected returns near the actuarial assumption.

What Callan told trustees

"If the board is interested in making a change, we would recommend incrementally increasing the fixed income exposure," Callan—s John Perron told trustees as he presented the mixes under consideration. Perron explained that rising yields have materially improved expected returns for core fixed income versus the environment covered by the previous 2021 study and that the improvement in bond returns strengthens the case for a measured derisking.

Callan presented three alternative mixes and a current-policy baseline. The board and its investment subcommittee focused on two pragmatically close options: Mix 2 and Mix 2US (the same allocation with a modest relative overweight to U.S. equities). Callan—s simulations showed similar 10-year expected funded-ratio trajectories across those options, with a modest improvement in downside projections for the Mix 2 variants compared with the current policy.

Board discussion and vote

Trustees discussed trade-offs at length. Subcommittee members and trustees characterized the choice as two forks: (1) keep the current policy, or (2) modestly increase core fixed income to reduce downside volatility. Some trustees favored Mix 2 US for historical home-market preference and because it improved downside metrics in Callan—s simulations; others were comfortable retaining the current policy.

A board member moved to adopt Mix 2 with the U.S. bias; Tommy Puckett seconded. The motion carried on a voice vote with one recorded dissent: Officer Jennings voted no. The meeting transcript records the result as "That motion passes," with Officer Jennings the only trustee recorded as opposed.

Amendment and next steps: manager searches and subcommittee review

Commissioner Hensley proposed an amendment asking that the board adopt direction to move toward Mix 2 but remit manager selection and final percentage allocations to the investment subcommittee; the subcommittee would bring recommended managers and final allocations back to the full board for approval. Hensley said: "I would like to make an amendment that we move the direction of mixed 2 without allocation, that the selection of the managers move into the subcommittee for a recommendation to the full board, and we consider the percentage allocations at the same time as we're considering the recommendations for the managers." The amendment was seconded and approved by the board.

Callan gave trustees a practical timeline: an external manager search and internal winnowing typically takes about 6–8 weeks, with the expectation that the subcommittee would return recommended candidates and proposed allocations for board consideration at the board—s November meeting. Callan also said existing managers such as Acadian had indicated they were receptive to an expanded mandate to include emerging markets if the board chose that route.

Other manager-structure points

Callan and trustees discussed the international equity sleeve. Trustees and consultants agreed that Bailey Gifford and the board—s emerging-markets manager (identified in the presentation as "Cap Guardian" / Capital Guardian) had underperformed in recent periods and that restructuring the international sleeve had merit. Callan proposed two structural alternatives: replace the two underperforming satellites and broaden the core manager—s mandate, or replace the satellites and split the remainder into complementary growth and value active mandates. The subcommittee agreed that a change was needed and will vet candidate managers as part of the search.

Quotes

"If the board is interested in making a change, we would recommend incrementally increasing the fixed income exposure," —John Perron, Callan Associates.

"I would like to make an amendment that we move the direction of mixed 2 without allocation, that the selection of the managers move into the subcommittee for a recommendation to the full board," —Commissioner Hensley (amendment as stated at the meeting).

Key clarifications and figures from the meeting

- Funded status (mid‑2025): about 73% (actuarial inputs provided by Cavanaugh MacDonald Consulting). - Actuarial investment return assumption cited in the presentation: 7.0%. - Reported investment account market value (treasurer—s figure reported earlier in the meeting): $1,023,230,229.84. - Callan—s 10‑year projection with current policy: projected funded ratio rising toward ~90% on average; simulations show a range of outcomes in stressed scenarios and modest downside improvement under the Mix 2 variants. - Manager search timeline: Callan indicated 6–8 weeks for manager search and internal review, with trustee voting expected in November.

Ending

Trustees adopted the policy direction to incrementally increase core fixed income and to tilt the equity sleeve modestly toward U.S. equities; they directed the investment subcommittee to run a manager search, select candidate managers, and return recommended allocations to the full board for a final vote. Trustees heard Callan—s recommendation and asked staff and the subcommittee to return with manager candidates and allocation details at the November meeting.