Recently, the National Conference on Public Employee Retirement Systems (NCPERS) released “Measuring Public Pension Health: New Metrics and New Approaches” to provide a more comprehensive set of metrics for measuring a public pension system’s fiduciary soundness.The Pension Accounting Working Group, consisting of 15 members from various research, policy, and retirement agencies, began their study in February of last year after previous NCPERS research determined that the Government Accounting Standard Board’s (GASB) accounting rules for public pension systems were not providing adequate information for fund managers and lawmakers.
Authored by Tom Sgouros of The Policy Lab at Brown University in Providence, RI, the new study recommends the following:
- Scaled Liability – Measuring the pension system’s liability relative to the proportion of the economy in which it exists provides a much clearer picture regarding fund sustainability. This risk management tool compares economic strength and existing task burden and drills down on what specific moves can help improve or stabilize a fund depending on the size and capacity of its state economy. The study compares the Los Angeles County Employees Retirement Association (LACERA) and The Detroit Police and Fire system. Even though LACERA had a consistently lower funded status than Detroit Police and Fire during the study period, the full liability for its pension fund was a much smaller percentage of its economy.
- Unfunded Actuarial Liability Stabilization Payment (USP). While the UAL balance sheet is a known method to gauge plan health, the USP defines an objective benchmark for capital that helps determine how much it costs to maintain a specific funding level. By comparing this standard to the actual cash flow of a pension system, plan managers can gain a broader understanding of plan health. For instance, the Oklahoma Public Employee Retirement System (PERS) saw its funding ratio drop between 2000 and 2010. However, a decline in service fees in 2010 prompted the USP to drop below contribution rates, and the funding ratio returned to a favorable status.
- Risk-Weighted Asset Value. This metric gives insight into asset value and how well a plan will sustain volatility in the stock market based on investments and available cash flow. Risk-Weighted Asset Value evaluations could cost less than systematic stress tests widely used now. The research highlights the Arizona Public Safety Personnel Retirement System (PSPRS). With a positive cash flow of 2.11%, the plan can withstand a market downturn without making many concessions. If the cash flow were negative, the fund managers would need to make the proper adjustments to survive a bear market unscathed.
The report states that “ultimately, what stands behind any pension plan is the financial strength of the plan sponsor.” Providing cities and states with increasingly comprehensive tools and standards will continue strengthening and supporting essential defined-benefit retirement systems. NCPERS’s newest recommendations consider just how necessary it is to protect pensions for our indispensable public workforce, their communities, and the economies they support.