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How Can We Enhance Sustainability Of Public Pensions? What Do We Mean By Sustainability Valuation?


[A conversation between NCPERS executive director and counsel, Hank H. Kim, and NCPERS director of research, Michael Kahn, Ph.D. about NCPERS new research, Enhancing Sustainability of Public Pensions.]

 
 

How Can We Enhance Sustainability Of Public Pensions? What Do We Mean By Sustainability Valuation?


[A conversation between NCPERS executive director and counsel, Hank H. Kim, and NCPERS director of research, Michael Kahn, Ph.D. about NCPERS new research, Enhancing Sustainability of Public Pensions.]

Hank H. Kim: Hi Michael, how are you?

Michael Kahn, Ph.D.: Hi, thank you, Hank.

Kim: I'm very excited to talk about [the] sustainability of public sector pension plans. Let me start with the first question, which is how do we enhance the sustainability of public pensions?

Kahn: We can enhance [the] sustainability of public pension by introducing a new tool that we have developed on top of what public pensions already do, including actuarial valuation, employers funding discipline, sound investment policies, stress testing. These are the kind of tools they already have, and they use them well. We have developed one more tool that could be very helpful because if pension funds follow all the good practices, they can still be thrown off balance by a drastic economic event. Therefore, this particular new tool, Sustainability Valuation, can be used to keep the pension plan stable of the ratio between the unfunded liability and the economies stable going forward. You can really do well even if there's a drastic economic event. 

Kim: Wow, that sounds very exciting. So, this is a new tool that you layer on top of all the existing other tools and methodologies that public plan already used. So, tell us, what do you mean by Sustainability Valuation? What is that?

Kahn: Sustainability Valuation is just like Actuarial Valuation, so what you're doing is looking at sustainability which is a well-established concept in economics. It means that the ratio between the debt and [the] economy is stable. If that's the case, then the debt is sustainable, so we apply this to unfunded liabilities. To see if the ratio between unfunded liabilities and the economy is stable. If that's the case, you know your assets, the unfunded liabilities are sustainable. If they are not sustainable, and that's what we determine using then this new tool, Sustainability Valuation, that there it's not stable, we need to make an adjustment to make it stable going forward. That's really what [Sustainability Valuation] means; that's what it means in terms of Sustainability Valuation.

In the coming weeks, NCPERS will release videos between Kim and Kahn discussing different aspects of Enhancing Sustainability of Public Pensions.
 

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