The assessment covered on this webpage represents one form of risk modeling – stochastic risk modeling. For more information and for other forms of risk modeling prepared by the Office of the State Actuary, please see the Commentary on Risk webpage.

Assessing risk using stochastic modeling allows actuaries to demonstrate and assess the effect of unexpected experience on pension plans. For example, how does the volatility of annual experience impact our pension plans? How might below expected investment returns, lower than expected state revenue growth, or above expected inflation impact their financial risks? How could their affordability and funded status change in the future? Additionally, how do “past practices” in the areas of meeting funding requirements or enhancing benefit levels via legislation impact our pension plans if those practices continue?

To perform such risk assessments and answer questions like the ones above, we created a customized stochastic model and employ a range of assumptions that differ from the assumptions we use in our standard actuarial valuations. We review and update those assumptions regularly. For more information on the underlying assumptions used in our most current model, please see the Projection Disclosures. Otherwise, additional information on the model can be found in the 2016 Risk Assessment Assumptions Study.

Each year, we update the risk profile for our state pension plans following the completion of our annual actuarial valuation. We consider a risk profile under two sets of assumptions (Current Law and Past Practices).

  • Current Law – Where we assume all plans receive the full, actuarially required contribution amount (subject to certain assumed maximums) and benefit provisions remain unchanged over time.

  • Past Practices – Where we assume all plans receive a percentage (less than 100 percent) of the actuarially required contribution and the Legislature enhances benefit provisions in the future consistent with past practices.

We display the risk measurements under the two sets of assumptions below. These tables were measured based on the most recent Actuarial Valuation Report (AVR), and market returns through June 30, 2020. Please see the projection disclosures for additional assumptions beyond the AVR. Given the measurement date, June 30, 2019, these tables do not reflect any changes in plan experience due to COVID-19.

At the time of publication of this webpage, we do not know the full extent of COVID-19 and its impacts to the state pension plans. We developed a dedicated page, COVID-19 and its Impacts to the Washington State Retirement Systems, that discusses some of the potential impacts as well as an assessment of its risk using stress testing.

 

 

For these stochastic measurements, we select two categories that generally compete: affordability and solvency. We measure “affordability” by comparing the amount of pension contributions from the state, as an employer, to the revenue from the state’s general fund budget (or GF-S). We measure “solvency” by determining how many future scenarios for our state pension plans result in “pay-go” (premature trust fund exhaustion) or result in a funded status below 60 percent. Improving one category will generally weaken the other. For more information on these measurements and the current status of the retirement systems, please see the 2019 Report on Financial Condition and Economic Experience Study.

These select risk measurements provide a helpful and quick at-a-glance summary of the financial risks of the state pension plans. The values change each year and can also change materially with the use of different assumptions and methods. Please see Projection Disclosures for the underlying assumptions used in the model.

We believe these measurements assist stakeholders in the identification, measurement, and management of financial risks in the state’s pension plans. To that end, we believe the model and measurements provide the most value when monitored over time and when used to evaluate and understand why risks change over time (or how risks would change when considering a proposed revision to the pension system). We do not intend the model to provide forecasts and the risk measurements do not represent forecasts or predictions for the underlying risks.

We also generate graphs for each risk metric that provide additional information on the likelihood, amount, and timing of a given risk based on the assumptions and methods we use in our model. Please see our Risk Assessment Graphs webpage for more information. We will continue to update the risk assessment model and these risk measurements annually. Please replace the risk measurements in the future when a more recent set of measurements becomes available.

If you would like additional information and background on the development of the original risk assessment, please see the 2010 Risk Assessment Report. If you would like additional information and background on other risks to the pension plans, please see the Commentary on Risk webpage.

 

Last Reviewed: 12/11/2020

Last Updated: 12/11/2020