Well-defined risk management frameworks adopt clear risk measures and put in place boundaries for risk taking before problems arise, making it easier to implement politically difficult decisions in response to adverse developments. In a paper by the Harvard Kennedy School's Mossavar-Rahmani Center for Business & Government--"Better Measurements: Risk Reporting for Public Pension Plans"--experts consider the question: What are the objectives of risk measurement?
One theme that more than 40 public pension experts agreed on was the value of having improved metrics and processes that would allow plans, and their sponsoring governments, to better measure and manage risk.
Pension underfunding and exposure to financial market risk has had a significant impact on state and local governments over the last two decades.
The most essential factors to analyze are investment and contribution risk, according to the paper. In discussing the objectives for better measurement, it reviews current reporting standards, and discusses a strawman proposal from Pew Trusts for uniform practices.
A key objective for risk measurement is to support long-term planning and decision-making--not just for fiduciaries, but for government policymakers and budget officials as well, the paper suggests. At its core, risk reporting should be designed to inform pension and budget planning and should provide a basis for decisions that promote the fiscal health of retirement systems and their sponsoring governments.
New actuarial standards for pension risk reporting may help to achieve these objectives, according to the paper. In particular, recent standards published by the Actuarial Standards Board in 2017 offer comprehensive guidance on measuring investment, contribution, and other...