National Association of State Retirement Administrators

Risk Assessment

Risk Assessment Among Public Pension Plans

Public retirement systems manage a variety of risks, including those relating to investments, operational issues, and the funding or financing of pension benefits. Identifying and measuring these risks is key to successful administration of a retirement system. This page focuses on risk assessment concerning funding and financing of public pension benefits.

Actuarial Standard of Practice (ASOP) No. 51, Assessment and Disclosure of Risk Associated with Measuring Pension Obligations and Determining Pension Plan Contributions, defines risk as "The potential of actual future measurements deviating from expected future measurements resulting from actual future experience deviating from actuarially assumed experience." ASOP 51 requires the actuary to conduct a risk assessment of the pension plan when performing a funding valuation of the plan.

Public pension risk assessment can be composed of any combination of the following:

  • Stress testing, also known as scenario testing, is an analysis or simulation designed to measure the effect on the plan of various projected—particularly adverse—investment and actuarial events.
  • Sensitivity testing examines the effect on the plan of different actuarial assumptions and methods.
Each of these elements of risk assessment is described below:

Typical Factors Included in a Public Pension Stress Test

Factors a public pension stress test may measure include, but are not limited to:
Inputs Outputs
  • Investment returns
    • above and below projections (deterministic)
    • randomly assigned (stochastic)
  • Required plan costs
  • Contributions
    • sufficient
    • insufficient
  • Volatility
  • Demographic experience
  • Assets
  • Inflation
  • Liabilities
  • Asset allocation
  • Funding level
  • Amortization period(s)
  • Cash flow

Sensitivity Testing

Actuarial Standard of Practice No. 51 defines a sensitivity test as a process for assessing the impact of a change in an actuarial assumption on an actuarial measurement. A sensitivity analysis typically focuses on a handful of actuarial assumptions that are most consequential to the condition of a pension plan. These assumptions typically include those for investment return, inflation, population growth, payroll growth, and employer contribution effort. 

New GASB standards, Statements 67 and 68, require plans to calculate and report their funding level based on a projected investment return of plus and minus one percent from their assumed investment return; this also is a basic form of sensitivity testing.

Public Pension Risk Assessment Criteria and Results

Public pension risk assessment is required by statute in some states, while most other systems perform them via their own volition, without a statutory requirement and under various monikers. The factors and methods used to conduct risk assessments also vary. Below are listed some examples of published public pension risk assessments.





North Carolina