April 2016

New Pension Tier Improved After Senate Consultation

Despite concerns from the Academic Senate about implications for the future quality of the University, the UC Regents have approved new pension plan terms for UC employees hired on or after July 1, 2016.

The plan approved by the Regents for the “2016 Tier” was recommended by President Napolitano, following a systemwide review of options proposed to her in a report from the Retirement Options Task Force (ROTF).

The 2016 Tier meets the requirements of an agreement between UC and the state to implement a pension plan for new employees with a cap on pensionable salary aligned with the Public Employee Pension Reform Act (PEPRA), in exchange for $436 million in Proposition 2 funds paid to UCRP over three years. Pensionable pay currently is capped at the Internal Revenue Code (IRC) limit of $265,000; the PEPRA limit currently is $117,000, indexed to inflation. The agreement also permitted UC to offer a supplement to the PEPRA cap to select groups of employees.

Four Senate representatives—Senate Chair Dan Hare, Vice Chair Jim Chalfant, UCFW Vice Chair Lori Lubin, and UCPB Chair Shane White—served on the 13-member ROTF, whose recommendations were released for a 30-day review on January 15. The Senate chair and vice chair also collaborated on a Guide to Reviewing the Report.

On February 10, the Assembly of the Academic Senate passed a resolution opposing the imposition of the PEPRA cap on the University in the absence of compensating increases to total remuneration. The Academic Council followed-up with a letter to the President describing how the proposed options could harm the University: by significantly reducing the value of UC’s retirement benefit for future employees, these options would greatly undermine UC’s ability to make the competitive offers necessary to recruit and retain outstanding faculty.

                    

The approved plan differs in some critical ways from the one reviewed by the Senate, particularly in its approach to the supplement available to faculty. “The Senate expressed grave concerns about the options proposed by the Task Force, but the concerns were given due consideration,” Senate Chair Dan Hare said. “In particular, the Senate’s request to consider a plan with a supplement starting on the first day of hire and on the first dollar earned was adopted by the President. In the end, I believe the approved options are the least harmful to UC of those that were considered. “

Under the plan approved by the Regents in March, new employees will have a choice of two retirement plans: Option 1) a Defined Benefit pension plan with the PEPRA cap and a “410(k)-style” supplemental benefit or Option 2) a stand-alone “401(k)-style” Defined Contribution plan.

Under Option 1, all employees will contribute 7% of pay up to the IRC limit. In addition, for faculty, UC will apply a 5% DC supplement on the first dollar earned up to the IRC limit; for staff and other academic employees, UC will apply a 3% DC supplement to pay above the PEPRA cap up to the IRC limit. Option 2 offers employees a stand-alone 401(k)-style DC plan with an employee contribution of 7% and an employer contribution of 8% up to the IRC limit for all employee groups.

Employees who choose Option 2 at hire will have the option to switch to Option 1 five years later. Faculty will be permitted a potentially longer timeframe—up to one year after the tenure decision—subject to IRS approval.

Hare says that the approved Option 1 provides faculty with an opportunity for greater income replacement in retirement compared to the original version of Option 1, and that a faculty member starting a UC career at the median salary ($76,200, excluding highly-compensated disciplines like Business, Economics, Engineering, and the Health Sciences) could be no worse off under Option 1 of the 2016 tier than under the 2013 tier.

“By starting the DC supplement on the first day and the first dollar earned, the plan addresses the Senate’s concern of a supplement being too small and starting too late to be effective,” he said. “Option 1 should give Assistant Professors in most disciplines such as those in the Humanities, Social Sciences, and the non-medical Life Sciences an opportunity to receive about the same replacement income as their colleagues hired under the 2013 tier, and allow those departments to be no less competitive than now in recruiting the high-quality faculty members they need.”

Hare emphasizes the word “opportunity,” because all analyses assume investment returns equal to those of UCRP, or an average of 7.25% annually from hiring to retirement, an assumption that may no longer be reasonable. Moreover, the replacement income in retirement from the DC supplement is not guaranteed. Unlike the 2013 tier, employees in the 2016 tier assume the risk in managing the DC portion of their retirement portfolio.

Hare says the portability of Option 2 could make it the preferred one for employees who do not expect to stay at UC for more than five years. He adds that the Senate does not fully support Option 2 because the 8% employer contribution is less generous than the recommendations of the ROTF and below that of most of UC comparators.

“Although the portability and shorter vesting period for Option 2 will benefit short-term employees, it seems unattractive to a committed UC career employee,” he said. “The projected income replacement under Plan B will be insufficient to preserve competitive total remuneration, and will reduce the incentive for employees to decline outside offers in early- or mid-career and retire at a targeted age. The expected retirement benefits will be too low to encourage most faculty to retire at 65, or even 70. The Senate therefore supported the proposal of a second choice for employees who chose the DC plan, so that they can switch plans, if their relationship to the University becomes stronger.”

The plan approved by the Regents also responds to Senate concerns that faculty who choose Option 2 should be able to switch to Option 1 at the tenure point.

Chair Hare says the ROTF was given an impossible charge—to develop options that preserve the competitiveness of UC retirement benefits, protect the financial sustainability of UCRP, and produce cost savings.

Unfortunately, he says, the first goal has not been achieved through the options; the second is likely to be achieved largely as a result of past actions such as the adoption of the 2013 tier and subsequent UC funding and borrowing decisions. The approved plan projects cost savings of $99 million per year over 15 years through reduced benefits and the lower employer contribution in Option 2.

While not endorsed by the ROTF, a major departure in the approved plan is the difference in benefits offered to faculty and staff under Option 1. This disparate treatment may in part reflect recognition that UC competes for faculty in a global marketplace.

“Although it is unfortunate that the plan separates the benefits for faculty and staff, it was probably inevitable, once the decision was made to start the supplement to compensate for the PEPRA cap on the first dollar earned. Offering the supplement to all employees would have resulted in retirement benefits for employees whose salary never reached the cap to be greater in the 2016 tier than for employees in the 2013 tier.”

The President has also responded to the Senate’s concerns by pledging to address the issue of salary competitiveness by increasing funding for regular pay increases for faculty and staff, to provide campuses additional resources to support the recruitment and retention of faculty, and to expand the Mortgage Origination Program to help faculty with housing costs. The Senate anticipates the opportunity to participate in the design of recommendations on salary competitiveness to be brought to the Regents.

Still, core Senate concerns remain unchanged. “Senate reviewers recognized that the quality of a UC education is a direct reflection of the quality of the faculty who provide that education,” said Chair Hare. The University is moving forward with a pension system that will offer very different benefits for new and older employees, challenge UC’s ability to recruit and retain world class faculty.