Testimony: Nebraska Taxpayers, Employees and Retirees Would Benefit From Pension Stress Testing
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Testimony: Nebraska Taxpayers, Employees and Retirees Would Benefit From Pension Stress Testing

Stress testing can help stakeholders better understand the potential financial risks facing pension systems.

Testimony Before the Nebraska Retirement Systems Committee on Legislative Bill 586.

Chairman Kolterman, members of the committee, thank you for the opportunity to offer a brief technical assessment of Legislative Bill (LB) 586 and the implications of deploying stress testing to monitor the resiliency of public pension systems.

My name is Steven Gassenberger and I serve as a policy analyst with the Pension Integrity Project at Reason Foundation. We are a national 501(c)(3) libertarian think tank that offers pro-bono technical assistance and policy research to public officials and other stakeholders to help design and implement policy solutions aimed at improving public pension plan resiliency, promoting retirement security for public employees, and lowering long-term financial risks to taxpayers.

LB 586 does not impact the benefit design, funding policy, assumptions, or amortization policy and methods of any pension system. Rather, LB 586 would leverage private sector financial stress testing methods to help policymakers, retirees, and stakeholders understand the financial risks and long-term sustainability of the retirement plans serving municipal workers.

The Pension Integrity Project has for years suggested public pension systems use stress testing to assess their ability to maintain plan solvency through normal market fluctuations and unforeseen “black swan” events. Understanding a public pension plan’s stress points provides an opportunity for managers to implement preventive measures that can either limit the impact of the discovered risks or avoid the negative situation entirely.

Traditionally, reports provided to public pension plan boards and stakeholders give long-term forecasts assuming a year-to-year outcome that exactly matches their assumed long-term investment return, but, as the last two decades would attest, expecting inherently volatile market returns to match assumptions each and every year fails to paint an accurate portrayal of the relationship between the natural volatility of global investment markets and public pension funding.

Instead of showing only those scenarios system managers assume, stress testing explores a range of realistic scenarios to more comprehensively demonstrate what could possibly happen over the next few decades. This allows policymakers to see not only where the system’s financial health is today, or where it is expected to be in 30 years, but how the system would be impacted in times of unforeseen economic volatility.

While actuarial standards of practices and national governmental accounting standards are starting to improve pension risk reporting, policymakers in several states have supplemented pension system risk reporting with additional stress tests.

North Carolina, Virginia, Washington, Hawaii, and several other states have recently adopted similar pension stress testing measures requiring routine risk assessments that hopefully, over time, will prompt much more active discussions related to pension risk management in those states. Risk assessment methods adopted by the Colorado Public Employees’ Retirement Association (PERA), for example, identify funding weaknesses and helped mobilize a robust group of stakeholders dedicated to long-term solvency and resiliency of the state’s public pension system. This mobilization ultimately resulted in Colorado passing comprehensive, bipartisan, and lasting pension reform in 2018.

Like these other states, routinely stress testing public pension systems would unlock the ability to apply uniformed metrics to what is currently a real, but largely unmeasured, challenge for Nebraska’s public pension systems. As written LB 586 would allow policymakers to rely on transparent accounting to spotlight the challenges and risks facing each pension system, ultimately empowering stakeholders in their effort to ensure the long-term resiliency and sustainability of these important public retirement systems.

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