Working Group offers new roadmap for gauging public pension health

Culminating more than a year of study, the Pension Accounting Working Group of the National Conference on Public Employee Retirement Systems has unveiled a roadmap for broadening the public understanding of what constitutes a healthy public pension system.

Three new metrics that can help guide decisions by managers and policy makers are among the options presented in the 66-page report, titled “Measuring Public Pension Health: New Metrics and New Approaches.”

Traditional pension accounting emphasizes risks that public pension plans do not face, while ignoring or downplaying others, according to Brown University researcher Tom Sgouros, who wrote the new report. That observation was the impetus for the creation of the 15-memeber working group in February 2021, in conjunction with Arnold Ventures and The Policy Lab at Brown University.

“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 says in a statement. “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.

As Sgouros notes in the report, the document “assesses the utility of these measures by calculating them for different systems, testing them against real data and real plans.”

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The report also focuses on 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,” Hank H. Kim, executive director and chief counsel of NCPERS, says in a statement. Kim served as the Working Group’s facilitator. “Public pension systems and policymakers should find the Scorecard valuable because it provides a crisp, clear way to comprehend nuanced and meaningful information about public pensions at a glance.”