The National Conference on Public Employee Retirement Systems recently released a report entitled “Measuring Public Pension Health: New Metrics, New Approaches” that introduces new mechanisms to account and judge the sustainability of pension plans.
To create these, the report’s author, Tom Sgouros, fellow and co-chair at The Policy Lab at Brown University, formed and hosted the Pension Accounting Working Group, a group made up of actuaries and public pension experts. The group assembled to measure the health of plans, and create new metrics to generate greater insights into a pension’s sustainability, so that trustees and policymakers could make better and more informed decisions.
The working group came up with three new metrics. The first is “scaled liability,” a measurement of pension liabilities against the size of the underlying supporting economy. The second is “unfunded actuarial liability (UAL) stabilization payment,” an objectively defined cash-flow policy standard comparable to the funding ratio. And last is “risk-weighting asset values,” a method to assess the value of a plan’s assets that accounts for a plan’s capacity to endure the downside risk it has taken through the allocation of its assets.
The scaled liability measurement uses economic strength as a proxy for tax capacity. This measurement helps decisionmakers get a read on a plan’s sustainability by providing a comparison between a pension plan and the economic strength of its sponsor. The Federal Reserve includes a comparison of net pension liability with measures of GDP and state revenues in the “Enhanced Financial Accounts” component of its “Financial Accounts of the United States” report.
Author(s): Dusty Hagedorn
Publication Date: 23 Sept 2022
Publication Site: ai-CIO