National Association of State Retirement Administrators

Stress Testing

Risk Measurement Among Public Pension Plans

For a public pension plan, a stress test is an analysis or simulation designed to measure the effect on the plan of various projected—particularly adverse—investment and actuarial events.

No consensus exists regarding the factors or processes that constitute a stress test. A stress test is one form of risk assessment, something that many public pension plans, particularly larger plans, have conducted for years, although not always labeled a "stress test." For example, asset-liability studies often contain risk assessments or stress tests.

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
  • Required plan costs
  • above and below projections (deterministic)
  • Volatility
  • randomly assigned (stochastic)
  • Assets
  • Contributions
  • Liabilities
  • sufficient
  • Funding level
  • insufficient
  • Amortization period(s)
  • Demographic experience
  • Cash flow
  • Inflation
  • Asset allocation

Other Forms of Risk Measurement Among Public Pension Plans

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; this also is a basic measure of risk.

Actuarial Standard of Practice No. 51, Assessment and Disclosure of Risk Associated with Measuring Pension Obligations and Determining Pension Plan Contributions, requires the actuary to conduct a risk assessment of the pension plan when performing a funding valuation of the plan.

Public Pension Stress Testing Criteria and Results

Public pension stress testing, sometimes referred to as a risk assessment, is required by statute in some states, while other systems perform them via their own volition, without a statutory requirement. The factors and methods used to conduct stress tests and risk assessments vary. Below are listed some examples of these factors and methodologies.








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