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What Is The Difference Between Sustainability Valuation And Actuarial 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].

 
 

What Is The Difference Between Sustainability Valuation And Actuarial 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.]
 
NCPERS Executive Director, Hank H. Kim: So, Michael, again, explain how Sustainability Valuation and Actuarial Valuation what their roles are and how they can work hand-in-hand. Thanks Hank. That's an important question. 

NCPERS Director of Research, Michael Kahn, Ph.D: Actuarial Valuation is evaluating the funding of pension plans to see if they will have enough money to pay the benefits at the end, when they are due. So, Actuarial Valuation evaluates assets liabilities and determines what should the employer contribution to meet that end goal of having money to pay benefits. Sustainability Valuation, on top of Actuarial Valuation. So, we are not saying stop doing your Actuarial Valuation. That has its own value. Sustainability Valuation is to look at whether the fund is going to be sustainable. Which really means that the ratio between unfunded liabilities and economy is stable. This ratio can be thrown off by drastic economic events and there is a way to make adjustments by doing the valuation of this ratio to keep it stable. That's really the main difference between the two. For instance, back in 2008-2009, when we had the great financial crisis and the subsequent decade after that where a number of states took pension reforms and took very drastic measures in their pension reform. If we had Sustainability Valuations, what might the results be? Or how would plans have approached it differently? The result would be that the plans will still be sustainable because now we hear just based on the magnitude of unfunded liabilities which were drastically increased due to the great recession. For example, market downturns, it's important to keep track of the ratio between economy and the unfunded liabilities because we know the unfunded liabilities are increasing. But at the same time economy is also increasing so that's what the important piece in this equation is- that we keep them sustainable as we go forward and not just throw our hands up. This is not sustainable and that's all those kinds of conclusions are very misleading because they are only based on looking at the magnitude of unfunded liabilities.


In the coming weeks, NCPERS will release videos between Kim and Kahn discussing different aspects of Enhancing Sustainability of Public Pensions. You can view our previous videos: Sustainability Valuation And Actuarial Valuation;  How Can We Enhance Sustainability Of Public Pensions? What Do We Mean By Sustainability Valuation?
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