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Funding Solution: Test the Resilience of the Pension Fund Regularly

Ideally, teacher pension boards will use modern and robust tools to test the system’s resilience in the event of another financial crisis or other economic downturns. Resilience looks at the overall financial health of the system, especially its ability to withstand unexpected pressures, such as a significant market downturn. Resilient plans are able to absorb negative experiences and bounce back to full funding quickly. Measuring how well a pension fund would perform if something back happened is sometimes called “stress testing.” It is complex reporting that can show members of the pension board, state legislatures, and educators themselves what could theoretically happen if something bad happens in the future (like a pandemic).

Some states already do this, but most do not. Best practice is to conduct annual testing of the resilience of the pension fund, using advanced analytical methods (formally called “stochastic analysis”), and with the results translated into easily understood language for the general public. For example, the pension system could be considered in a green zone (everything will be fine even if there is a pandemic), yellow zone (there are somethings to worry about that we should address before they get worse), or red zone (it is possible we could run out of money in the next decade or two if we don’t act now).

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