Increased Pension Contributions- What level is Currently Justified?

UC-AFT questions the necessity of an even faster start-up of employee contributions now being urged by some faculty -- and UC-AFT calls for greater accountability in the management of the fund, including employee representatation on the UCRP governing Board.   

Currently, UC has over $35 billion in the pension plan, and last year, it paid out $1.5 billion. It was a huge mistake to stop contributions in 1990, and so the current policy of 4% from the employer and 2% from the employee is good; however, it is unclear how much more employees should contribute each year, and dire predictions based on a narrow set of projected liabilities and returns do not provide adequate justification for further increases at this time.   Moreover, given that the University, without employee participation, made the decision to declare a contribution holiday and to borrow UCRP funds, UC-AFT believes that the University holds the lion’s share of the responsibility for achieving it’s current goal of 100% funding for UCRP.  UC-AFT maintains that if the UCRP governing board had included employee representatives, as do nearly all other California public pensions, much more conservative management of the fund would have resulted in better funding levels today.

Need for Stochastic Study of UCRP

UC needs to perform a stochastic study of UCRP to see a range of actuarial predictions that would then inform future contribution decisions.  Some of these models should be based on a higher rate of investment return, above the 7.5% figure used by the actuaries (the annual investment return has averaged 12% since 1980). The main reason why UC faculty and employees should question the current claims concerning the underfunding of the pension plan and retiree healthcare is that these accounting predictions are based on a whole series of economic variables.  In order to determine the future funding and liability of the plan, the accountants have to look into the future and estimate how well the UC’s investments will do, who is going to retire, what salaries will look like down the road, the number of employees getting benefits, among other major variables.  In the recent past, the actuaries have been wrong on predicting most of these variables, and so while we should restart contributions, we should not be scared into accepting a high level of employee contributions.   A stochastic study could be used to set reasonable contribution rates based on actual return and liability benchmarks in the future.

Problems with the Recent Stanford Study

In response to the recent study done by a couple of Stanford grad students about CalPERS, CalSTIRS, and UCRP, CalPERS has made the following observations: 1) even with the recent stock losses, over the long haul, the plans have all averaged higher than the 7.5% rate of return, and the Stanford model uses a very low rate of 4.4%; 2) all of the future predictions are tainted by the current low interest rate that is sure to go up, which would help increase income from the bonds that are in UCRP; 3) most pension plans remain healthy by being funded at 80%; UCRP is still at 95%.

 As Dean Baker has written, people are simply exaggerating the bad health of the Californian pension plans in order call for their abolition. In this context, it is strange than no one in the UC is calling for the capping of special executive pension payouts. For instance, if Mark Yudof stays for at least 4 years, he is guaranteed a yearly pension of over $250,000. Capping pension payouts at some level, like $125,000, as many other plans do, would save a ton of money.