Commentary on risk

In the course of conducting our actuarial analysis, we make hundreds of assumptions and apply them over measurement periods that can exceed 50 years. In some cases, small changes in these assumptions, or experience that plays out differently than expected, can lead to significant changes in the measurements. These sensitivities can evolve as the plans grow and mature over time. The Legislature’s response to these changes, and their actions governing the state’s pension system, also affect plan risk.

To help all users of our actuarial measurements better understand these risks and their impacts, the Office of the State Actuary (OSA/we) developed this educational webpage, which serves as a reference guide for certain key risk metrics. The information is divided into the following sections:

• Ways to Measure Risk, which summarizes some of the key methods that actuaries use to evaluate risk.

• Risk Measurements for Washington’s Public Pension Plans, which details a few risk tests that OSA conducts and highlights items like investment returns and contribution rate solvency/affordability.

• Demographic Risks, which describes the risk of member experience unfolding differently than assumed, particularly member mortality.

• Plan Maturity Measures, which explains some of the risks plans face as they grow and mature over time including enterprise risk, contribution rate volatility, and liquidity risk.

• Historical Information, which provides a resource to track key data and assumption values over the past ten years.

We illustrate the risks inherent in our actuarial measurements at a system-wide and plan level and consider how our actuarial measurements could vary under different circumstances. Such measurements include contribution rates, funded statuses, and actuarial fiscal notes.

This webpage also serves as our response to Actuarial Standards of Practice (ASOP) Number 51. ASOPs guide actuaries when performing and communicating their work. ASOP 51 stresses the importance of communicating risk in defined benefit pension plans, particularly in how actual future measurements may differ significantly from expected future measurements.

Where applicable, we relied on historical information to display tables and graphs which is documented internally. Unless noted otherwise, we rely on data, assumptions, methods, and assets consistent with the June 30, 2022 Actuarial Valuation Report (AVR) as well as assumptions and methods used in our 2022 AVR Projections Model to project figures beyond our June 30, 2022, measurement date, including investment returns through June 30, 2023. The projections shared below are based on our best estimate assumptions and methods which represent future experience matching our expectations. Actual future experience is unlikely to precisely match our assumptions, but we believe the displayed exhibits are appropriate tools for assessing future risks to the plan. For more information about how some of these results change when future experience does not match our assumptions, please see our Risk Assessment webpage.

We intend to update these projections every four years. Should you have any questions or interest in seeing other risk topics, please contact us at state.actuary@leg.wa.gov.

Historical Information

Often the easiest way for users to understand how measures can change over time may be to review a history of past actuarial measurements. See the Historical Data webpage on our website for select historical actuarial measurements from our past actuarial valuation reports.