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Risk Assessment

Risk Assessment

Risk assessments allow actuaries to demonstrate and assess the effect of unexpected experience on pension plans. For example, how does the volatility of annual experience impact our pension plans? How might below expected investment returns, lower than expected state revenue growth, or above-expected inflation impact their financial risks? How could their affordability and funded status change in the future? Additionally, how do past practices in the areas of meeting funding requirements or enhancing benefit levels via legislation impact our pension plans if those practices continue?

To perform such risk assessments and answer questions like the ones above, we created a customized model and employ a range of assumptions in the model that differ from the assumptions we use in our standard actuarial valuations. We review and update those assumptions regularly. Please see the 2016 Risk Assessment Assumptions Study for additional information on our latest study.

Each year we also update the risk profile for our state pension plans after we receive updated data and complete our actuarial valuation for the latest state fiscal year (June 30). We display the latest risk measurements below.

Pension risk as of June 30, 2015

For these measurements, we select two categories that generally compete: affordability and solvency. We measure “affordability” by comparing the amount of pension contributions from the state, as an employer, to the revenue from the state’s general fund budget (or GF-S). We measure “solvency” by determining how many future scenarios for our state pension plans result in “pay-go” (premature trust fund exhaustion) or result in a funded status below 60 percent. Improving one category will generally weaken the other.

These select risk measurements provide a helpful and quick at-a-glance summary of the financial risks of the state pension plans. The values change each year and can also change materially with the use of different assumptions and methods. We believe these measurements assist stakeholders in the identification, measurement, and management of financial risks in the state’s pension plans. To that end, we believe the model and measurements provide the most value when monitored over time and used to evaluate and understand why risks change over time (or would change when considering a proposed revision to the pension system). We do not intend the model to provide forecasts and the risk measurements do not represent forecasts or predictions for the underlying risks.

We also generate graphs for each risk metric that provide additional information on the likelihood, amount, and timing of a given risk based on the assumptions and methods we use in our model. We provide a link to the graphs below.

We will continue to update the risk assessment model and these risk measurements annually. Please replace the risk measurements in the future when a more recent set of measurements becomes available.

If you would like additional information and background on the development of the original risk assessment, please see the 2010 Risk Assessment Report.



Last Reviewed: 11/28/16
Last Updated: 11/28/16

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