A recently released report from Ortec Finance has some interesting findings about the U.S. public pension plan sector. According to the Ortec Finance report, 90% of public sector pension plan managers expect to increase spending on scenario modeling and stress testing in the next two years to manage market shocks. For TEXPERS System Members, scenario modeling and stress testing are familiar tools they use to better understand how market volatility may affect their pensions. We'll look at the report's key findings and provide context.
Ortec Finance designs and builds software models for asset-liability management, risk management, impact investment, portfolio construction, performance measurement and attribution, and financial planning. Ortec Finance surveyed 50 U.S. public pension fund managers in February 2023, using independent research company PureProfile.
Ortec Finance found that 14% of public pension plans had 60% or less funding ratios last year. The study shows that pension plans have shifted their risk profiles in response to inflation, with 32% expecting a dramatic increase. Around half of public sector pension plans believe inflation could be 3.3% or lower within a year.
Managers are still actively changing asset allocations to hedge against inflation, with 66% increasing allocations to commodities, 50% to infrastructure investing, and 32% to gold. U.S. public sector pension plan sponsors face extremely high uncertainty, but there is genuine optimism that lower inflation will become well-established.
You can download the full report here.
What TEXPERS System Members Can Get Out of This
By simulating different scenarios and testing their plans' resilience, pension plan managers can identify and address potential weaknesses.
The report also highlights that pension plan managers increasingly turn to technology to help them with their scenario modeling and stress testing efforts. With the help of advanced analytics and other tools, pension plan managers can gain a deeper understanding of the risks they face and develop more effective strategies to manage them.
According to the report from Ortec Finance, the public sector pension industry is increasingly focusing on risk management. With market volatility on the rise, pension plan managers are taking steps to ensure their plans remain resilient in the face of potential shocks. By investing in scenario modeling and stress testing, they are positioning themselves to understand their risks better and develop more effective strategies to manage them.