Working Group Offers New Roadmap for Gauging Public Pension Health
Culminating more than a year of study, the Pension Accounting Working Group has unveiled a roadmap for broadening the public understanding of what constitutes a healthy public pension system, the National Conference on Public Employee Retirement Systems has announced.
Three new metrics that can help guide decisions by managers and policy makers are among the options presented in the report, "Measuring Public Pension Health: New Metrics and New Approaches." The Working Group was convened in February 2021 by NCPERS, working with Arnold Ventures and The Policy Lab at Brown University.
Traditional pension accounting emphasizes some risks that public pension plans do not face, while ignoring or downplaying others, and that observation ? detailed in a 2019 report for NCPERS by Brown University researcher Tom Sgouros ? was the impetus for the creation of the 15-person Working Group. Sgouros, who co-chaired the Working Group, said the 2019 research identified numerous problems with the accounting rules, which led to formation of the Working Group to devise solutions.
"The Working Group did not set out to tear down the existing edifice, but to propose new metrics that represent additional ways to look at some aspects of a pension plan," Sgouros said. "The report's centerpiece is a Pension Funding Scorecard that presents a standard and succinct set of key metrics that reflect not only financial condition, but policies in place and management actions ? all of which impact a system's health."
The proposed new metrics, which are intended to be incorporated in the Scorecard, consist of:
- Scaled Liability, which standardizes the measure of pension liability against the size of the economy that supports it.
- UAL Stabilization Payment (USP), which builds upon a widely used balance sheet metric to create an objective measurement of cash flow against which a plan can be measured.
- Risk-Weighted Asset Value, which measures asset value against a plan's capacity to withstand a bear market, given its current cash flow and asset allocation.
The report also discusses the use of computer simulation methods, such as stress testing and sensitivity testing and projections, to gain insights into the health of pension plans.
"Funding levels are only one of several measures of the condition of public pensions, and the Scorecard with its new metrics provides a much more complete view," said Hank H. Kim, executive director and chief counsel of NCPERS, who served as the Working Group's facilitator. "Public pension systems and policy makers should find the Scorecard valuable because it provides a crisp, clear way to comprehend nuanced and meaningful information about public pensions at a glance."
Kim added: "As the Working Group's facilitator, I am proud of the work performed by a distinguished group of public pension experts. Sgouros, as co-chair, has worked tirelessly to bring a fresh perspective to public pensions by challenging assumptions that give the appearance of having hardened into facts. His fellow cochair, Scott McCarty of the Arizona Public Safety Personnel Retirement System, ensured that a practitioner's point of view was front and center in the discussions. Twelve more committee members brought energy and ideas to the table."
About NCPERS
The National Conference on Public Employee Retirement Systems (NCPERS) is the largest trade association for public sector pension funds, representing approximately 500 funds throughout the United States and Canada. It is a unique non-profit network of public trustees, administrators, public officials and investment professionals who collectively manage more than $5 trillion in pension assets. Founded in 1941, NCPERS is the principal trade association working to promote and protect pensions by focusing on advocacy, research and education including online learning for the benefit of public sector pension stakeholders.
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