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Pew Charitable Trusts: Stress Test Report for Connecticut SERS and TRS

Written by Pew Charitable Trusts | Dec 13, 2018 11:37:00 PM

Required by Section 109 of Conn. Acts 17-2 (June Special Session) to be conducted annually and reported to the General Assembly's Appropriations Committee, this stress test report of Connecticut's State Employees Retirement System (SERS) and Teachers' Retirement System (TRS) was conducted by The Pew Charitable Trusts and includes projections of benefit levels, pension costs, liabilities, and debt reduction under various economic and investment scenarios.

Information contained in the stress test report is designed to help policymakers:

  1. Plan for the possibility of an extended period of lower investment returns and higher budget costs;
  2. Prepare for the impact of the next recession on pension system solvency and government budgets;
  3. Assess whether current policies are sufficient to effectively manage financial market volatility throughout the business cycle;
  4. Estimate the impact of investment risk on the range of potential costs for current benefits and liabilities; and
  5. Provide budget officials and legislators with a tool to assess the impact of proposed and enacted policy changes.

Along with the stress test report of SERS and TRS, The Pew Charitable Trusts produced an analysis of the stress test, which included the following key findings.

  • The Connecticut state budget is exposed to potentially unaffordable spikes in required pension contributions in scenarios where investment returns fall short of expectations.
  • Connecticut SERS has minimal exposure to solvency risk or fiscal distress under an adverse recession scenario; however, TRS’s risk of insolvency is not insignificant if required contributions are not met, but instead are kept constant as a share of budget.
  • Recent reforms to SERS demonstrate positive results in managing financial market volatility and mitigating investment risk. In contrast to TRS, the new funding policy for SERS translates into a relatively stable level of required contributions under a range of scenarios.
  • Low funded levels may result in persistently high costs for decades if investments underperform. While the state’s current level of contributions helps to diminish the likelihood of fiscal distress, a realistic and achievable plan to reach full funding will still be needed to lower the impact of pension costs on the state budget over time.

Citation for Pension Stress Test
Mennis, G., Banta, S., & Draine, D. (2018). Proposed Legislative Stress Test Report for Connecticut Public Pensions. Philadelphia, PA: The Pew Charitable Trusts. Retrieved from https://portal.ct.gov/-/media/malloy-archive/press-room/20181214-pew-proposed-legislative-stress-test-report-for-connecticut-public-pensions.pdf?la=en.

Citation for Analysis of Pension Stress Test
Mennis, G., Banta, S., & Draine, D. (2018). Stress Test Analysis Tailored to Connecticut's Retirement System. Philadelphia, PA: The Pew Charitable Trusts. Retrieved from https://portal.ct.gov/-/media/malloy-archive/press-room/20181214-pew-stress-test-analysis-tailored-to-connecticuts-retirement-system.pdf?la=en.