June 2010

 

Interview with Robert Anderson: The Future of Post-Employment Benefits

 

Robert Anderson is a UC Berkeley professor of economics, chair of the UCFW Task Force on Investment and Retirement, and incoming vice chair of the Academic Council. The Senate Source spoke with him about issues facing the UC Retirement System and proposals for benefits redesign that faculty can expect to see emerging from the President’s Task Force on Post Employment Benefits later this summer.

 

Senate Source: What is the Task Force considering for future employee contributions to UCRP and for future pension and retiree healthcare benefits?

 

Robert Anderson: Starting in 2013, newly hired employees likely will be offered a different set of benefits than currently offered, creating a new Tier within UCRP, with full benefits payable at age 65 rather than age 60; there are several options under study, with varying employee contributions. Current employees will receive UCRP benefits for their past service under current UCRP plan provisions. Going forward, it is likely that current employees will be given a choice between having their future service take place within the new Tier, or contributing at a higher rate to retain the current UCRP plan provisions for their future service accrual.

 

SS: Please summarize the Task Force structure and working processes.

 

Anderson: Most of the analysis has been done within three working groups, with active involvement by Senate representatives, staff representatives, and administrators. However, the final recommendations will be determined by the Steering Committee, which is comprised largely of senior administrators with less expertise in the subject matter than the working groups.

 

SS: Help us understand the scope of the problem and why immediate action is imperative.

 

Anderson: The fundamental problem is that no contributions went into UCRP for over 19 years. Even with the planned contributions, UCRP will run a structural deficit of over nearly $1.7 Billion in the 2010-11 fiscal year. At a minimum, the contributions need to cover the “normal cost” of the plan: the present value of the additional UCRP benefits earned for this year’s service, which on average is equivalent to 17.5% of covered compensation for each employee. The normal cost for 2010-11 will exceed contributions by about $920 Million. In addition, the interest on the UCRP deficit probably will be in excess of $750M.

 

SS: If the UCRP funding problem is so significant, why are no major changes proposed to take effect until 2013?

 

Anderson: The most urgent need is to resume funding, to stop digging the hole deeper. Employer and employee contributions resumed in April 2010, and it is likely that the employer contribution will rise to 7% on July 1, 2011 and 10% on July 1, 2012, while the employee contribution will rise to 3.5% on July 1, 2011 and 5% on July 1, 2012. The new Tier is slated to begin in 2013 because the redesign of benefits is less urgent than the resumption of contributions, and because the process of obtaining Regental approval, drafting precise plan language, obtaining IRS approval, and collective bargaining and communication to employees will take considerable time.

 

SS: What is the anticipated timeline for Senate review and then final action by the Regents?

 

Anderson: The Task Force report is likely to be released in August. Senate review will occur from September through November. It is anticipated that the Regents will take action on the recommendations at a special meeting in early December.

 

SS: Are recent retirees or soon-to-retire employees in danger of losing some or all of their benefits?

 

Anderson: With regard to pensions, no; the pension benefit you have accrued is your vested right and cannot be taken away or reduced. With regard to retiree health benefits, it is likely that the University will gradually reduce its maximum contribution to retiree health; this will mean that current and future retirees will have to pay higher premiums for health benefits. With regard to both pensions and retiree health, there is no reason to rush to retire to “lock in” your current benefits.

 

SS: What do you say to faculty who are concerned that the end result of this process will be a less generous benefits package, at a time when faculty total remuneration is already about 10% below comparison institutions?

 

Anderson: This has been a major focus of the Senate representatives on the Task Force. Faculty are absolutely right to be very concerned. The Senate has emphasized repeatedly that competitive total remuneration is its top budget priority because it is inevitable that the quality of the University will decline if we are not competitive in recruiting and retaining the best faculty and staff.

 

SS: Does the perspective of the faculty representatives on the Task Force differ from that of the administrators, and if so how?

 

Anderson: The faculty representatives and some of the administrators have focused on the institution’s need to recruit and retain outstanding faculty and staff, which requires competitive total remuneration, and they have sought to design and finance the needed benefits in the most cost-effective way. Some of the members started with predetermined goals for how much they wanted to “save” by reducing post-employment benefits, without a clear understanding that reducing benefits will either require compensating salary increases, or leave us unable to recruit and retain outstanding faculty and staff.

 

SS: Some people are unconvinced about the urgency to restart and increase contributions to UCRP. Further, CalPERS and other public pension plans seem to be in worse shape, but there is less call for immediate action.

 

Anderson: CalPERS is less well-funded than UCRP at the moment. But CalPERS has been getting large contributions from employers and employees; UCRP was not getting contributions until April, and it is still getting much smaller contributions than CalPERS. CalPERS is following a reasonable plan to address its problem; UCRP needs to do the same.

 

SS: UCFW’s Task Force on Investment and Retirement has called for the issuance of Pension Obligation Bonds to fund the employer contribution until the state resumes its funding of UCRP, but some remain fearful of additional debt. How would POBs help UCRP?

 

Anderson: UCRP needs contributions equal to the Annual Required Contribution (ARC): the present value of the additional service credit earned each year, plus an additional amount to amortize the deficit in the plan. For every dollar of ARC that we do not contribute, we are in effect borrowing from UCRP at 7.5% interest to pay wages and keep the lights on. ARC for 2010-11 is 20.4% of UCRP-covered compensation, but we clearly cannot get that right now from the operating budget and employee contributions. The Task Force’s current thinking is that, rather than selling POBs on the outside market, we should instead borrow from the University’s Short-Term Investment Pool (STIP). We can borrow from STIP for less than 3%, which is much more attractive than borrowing from UCRP at 7.5%. In addition, STIP borrowing to support contributions for state-funded employees will enable us to obtain contributions on the two-thirds of employees funded by other sources, such as clinical income, student residences, and federal grants and contracts.

 

SS: Long-term planning priorities on the campuses do not always align with systemwide needs. Should the divisions prioritize UCRP over various local interests?

 

Anderson: We have no choice about paying off the deficit in UCRP; it is based entirely on past service, and cutting future benefits does not reduce the deficit. We may be able to reduce benefits of newly hired employees, but not by very much if we are to remain competitive. Whatever pension plan design we choose, we have to pay for it; there is no choice. We do have some choice as to when we pay for it, and the STIP borrowing is a way to reduce the damage to our operating budget by spreading out the payments.

 

SS: Are the proposed changes long-term design changes or short-term responses to the immediate crisis?

 

Anderson: Changes in pension plan design are, by definition, long-term changes, that ought to be based on long-term institutional needs. Restarting contributions is a response to the immediate crisis, but it simply represents a return to normal. The fact is that pension plans need contributions; we have been in a highly unusual situation in not making contributions from late 1990 to early 2010. Employer and employee contributions will continue to be needed in the long run.

 

SS: Some assert that UC should switch to a portable Defined Contribution plan. What are the strengths and weaknesses of that approach vis-à-vis UCRP?

 

Anderson: The UCRP defined benefit plan provides employees with a secure retirement after a full career at UC. It builds loyalty, helping us retain faculty and staff in mid-career. It also encourages faculty to retire at an appropriate age, facilitating faculty renewal. We would lose those benefits if we switched to a DC plan, and we would still have to pay off the deficit within UCRP; it would not provide any budget relief.

 

SS: Why should junior and mid-career faculty be interested in this process?

 

Anderson: Fixing the UCRP and retiree health benefits problems is going to impose an enormous strain on the UC budget for many years, and this will have a bigger impact on younger and mid-career employees than on those near retirement. On an individual level, if current employees are given a choice between the new pension Tier, or staying in UCRP under the current terms but with a higher employee contribution, younger faculty should weigh carefully the long-term benefit against the short-term costs of contributions. It is likely that mid-career employees will be grandfathered with respect to some of the retiree health changes, but that younger faculty will not be.

 

SS: Some fear that changes will be imposed by fiat, no matter the level of activity and concern of individual faculty. Why should individual faculty get involved and stay involved? How can they do so?

 

Anderson: The Senate representatives on the Task Force have had access to all of the materials and all of the working groups, and have had significant influence on the Task Force process. However, there are only two Senate representatives on the Steering Committee, which will determine the final recommendations. As of today (June 29), the Steering Committee apparently has not had a detailed discussion of the four pension options on the table and it’s not clear yet which one or ones they will recommend to President Yudof. As of today, Task Force members have not seen a methodologically satisfactory assessment of the impacts of the proposed changes on total remuneration. Despite this, the current plan is to send an Executive Summary containing recommendations to President Yudof within a week. However, assuming that the Regents defer action to a special meeting in December, there will be enough time for full Senate consultation. Like many difficult discussions, this one has pushed the most controversial deliberations to the very end, to the proverbial eleventh hour.