SDFA Pension Update

The University of California has been on a 16-year-long, $10.2 billion "contribution holiday" from its payments to the UC Retirement Plan (UCRP) -- the $42 billion defined-benefit pension fund for UC's current and future retirees. The university paid 4% to 16% of employees' salaries toward the UCRP until 1990, after which UC's contributions stopped. UC has not made payments into the plan during those 16 years, while employees have been paying 2% of their pay into a separate Defined Contribution Plan (DCP) throughout this period.

The UC has announced that pending contract negotiations (for those UC employees who are unionized) and state budget decisions, as of July 1 of this year, employees will begin to contribute 2% of their paychecks back into the UCRP, which the UC has said is necessary to assure the stability over time of the retirement fund.

Will faculty notice the 2% extra coming out of their paychecks on July 1st?
Not immediately. The university is redirecting money that employees were paying into the DCP back into the UCRP, and thus, your paycheck will not show a contribution beyond the 2% that formerly had been directed into the DCP. However, your DCP plan will cease to grow because paycheck contributions will be redirected to support the UCRP. In essence, the university is taking the money you had contributed into a second plan and diverting it to support the first. In essence, as of July 1st, your total compensation package will decrease by 2%.

Additionally, the university has announced that contributions by employees will ramp up over the next few years, further lowering total compensation. The SDFA and UC's Union Coalition agree that this will undermine UC's ability to recruit and retain faculty, and will be especially disastrous for low-paid staff and workers within the UC system.

What will happen to the UCRP over the next few years?
We believe that the Regents have no plan to eliminate the UCRP. They are willing to maintain a defined benefits system if employees are willing to contribute at least 8% of total compensation to do so. Under these circumstances, however, employees—especially the shortest-term and lowest-paid—are likely to demand a defined-contribution opt-out. These are the employees who effectively subsidize the relatively small percentage of us who expect to collect the full defined benefit. The contributory cost of maintaining the DB plans will rise until they die. While the Regents have no plans to kill the UCRP, it will die by adverse selection if it is funded largely (or entirely) through cuts in total compensation.

The UC Union Coalition and the Council of UC Faculty Associations (of which SDFA is a member) have argued that these proposed changes are troubling for several reasons:

1. Diverging from past practice -- before the pension contribution holiday began for both the UC and its employees, the University had contributed 4% to 16% toward the pension plan, and employees had typically paid 2%. The university is now calling for a radical shift in the funding mechanism for the UCRP -- while the university has suggested that additional contributions from both employees and the employer will need to be added in subsequent years until total ongoing contributions reach 16% of salary, UCOP has only set a schedule for employee contribution increases (2% this year, ramping up contributions until 2010) and has not yet provided a timeline for the resumption or increase of its contributions into the UCRP.

2. Lack of transparency -- The Segal Company, hired by the UC Office of the President (UCOP), conducted the initial actuarial study that suggested the necessity for employee contributions into the UCRP to resume. According to a separate actuarial study (conducted by Venuti and Associates) commissioned by the UC Union Coalition, Segal's initial study was flawed. The UC Union Coalition has suggested that the university has refused to provide the unions and other campus employees with the figures used to determine actuarial shortfalls in the UCRP.

See the Berkeleyan article that discusses the discrepency between the Segal and Venuti actuarial reports.
See UCOP's response to the Venuti Report.
See Venuti's response to UCOP response.

The Coalition of UC Faculty Associations (CUCFA) has spoken out in the past about the privatization of the UC system and has recently stated that the resumption of employee contributions is taking place at the same time as the university is brokering deals with Los Alamos National Lab (LANL) and Lawrence Livermore National Lab (LLNL). The Regents are planning to spin off approximately $4.4 billion of UCRS asset in April 2007 to the private partnership running LANL. LANL has a different demographic (older, longer term) and a different salary profile (higher) than the rest of the UC - so this pension is underfunded compared to the rest of the UC. UC plans to spin off enough assets to fully fund these underfunded liabilities, arguing that it was obliged to do this under its DOE contract. CUCFA has noted that the Segal Report on the Los Alamos National Lab (LANL) component of UCRS shows that its funded ratio is 94.7%, compared with 104.1% for UCRS as a whole. The Segal Report has also suggested that comparisons with Livermore National Lab would be similar. Thus, CUCFA suggests, the UC Committee on Faculty Welfare should have asked the question -- "Will the proposed UCRS asset transfer to LANL (and subsequently LNL) improve or worsen the hypothetical funded ratio of UCRS?" CUCFA argues that, based on the data that Human Resources has provided the organization, shedding the poorer Funded Ratio of LANL should make UCRS somewhat better off -- and shedding both labs should make UCRS substantially better off.

CUCFA asks a second question -- if, however, shedding the Funded Ratios of these two entities is instead harmful to the Funded Ratio of the UCRS, "we must ask why members in active service should make up the difference?" CUCFA has received data to suggest the relative underfunding of the LANL pension, but the UCOP has not stated conclusively whether UCRS or DOE will make up the difference between the two plans.

As CUCFA has noted, regardless of whether this is so, UC has not provided any data on the relative underfunding of LANL’s pensions in comparison to the relative overfunding of UCRS before the assert transfer; neither has it provided data on the effect that the asset transfer will have on the long- and short-term need for employee contributions in the now-separate entity. It simply assumes that the resumption of employee contributions in UCRS will cover its shortfall, and that this will happen again when LLNL is spun-off. The UCOP has thus far provided no details on the specifics of the spin-off deals for these two pension systems.

Perhaps the convergence of UC bids for LANL/LLNL and resumption of employee contributions in 2007 is mere coincidence. The burden, however, is on UC to provide data showing what difference it makes to cover the pension liabilities of those employees, rather than returning the assets, and to explain why UC’s remaining employees, rather than lab employees, Bechtel, DOE, or UC itself should contribute whatever it takes to make up that difference.

UC Unions have also given UCOP an "F" on actuarial and governance practices.
Read more about the lack of transparency, methodological problems, and need for sound governance of the UCRP (Power Point Presentation).

3. Governance of the UCRP -- many of the states other public sector pension plans, including that of CalPERS, the state's largest and most successful public pension plan, are governed through joint management. The Board of CalPERS, for example, is comprised of two member elected by active state members of the system; a member elected by CalPERS retirees; and a member elected by all other Board members. The UC Union Coalition and SDFA feel that management of the UCRP should be shifted to joint management between employee groups and the UC management for the following reasons:

1. Joint management increases retirement security through the internal resolution of disputes and priorities
2. Joint management helps to fulfill fiduciary duties by avoiding conflict of interest problems
3. Joint management includes all essential stakeholders who bring greater insight into Plan policy issues
4. Joint management facilitates communication of information to Plan participants

4. This proposal shifts costs onto UC employees already underpaid by market standards -- On October 25, 2006, the Academic Council took the position that UC should provide an additional 3% COLA for 2007/08 to compensate for the 2% employee pension contribution (the 2% that would be redirected from the DCP back to the pension, plus 1% to account for tax consequences resulting from the shift). This 3% would be on top of the 4% COLA that is currently needed to match salary increases at comparator institutions.

Want to learn more?
UC Berkeley faculty member and watchdog, Charles Schwartz, has offered extensive critique of UC management. Read his summary of the current situation, how our pension plan compares with other state plans, and his analysis of performance reports for UC's External Investment Managers.

What can we do to protect our pension and benefits?
1. Sign the Petition to Protect our Pension & Benefits
2. Support the Academic Senate's demands for pay increases to compensate for employee contributions, and the Council of UC Faculty Associations' call for increased transparency and accountability regarding the transfer of pension assets and liabilities to the privatized energy lab pensions.
3. Contact the Regents and let them know where you stand!

Please contact the SDFA office (800) 431-3348 with additional questions!

©2007 California Conference of the American Association of University Professors
This page was last updated on February 13, 2007.