The Senate Source

August 2015

Retirement Options Task Force Begins Work

Four Academic Senate representatives are serving on a Task Force charged by President Napolitano to design and develop retirement plan options for UC employees hired after July 1, 2016.

UC agreed to implement new pension options for future employees as part of a multi-year budget agreement with Governor Brown that provides UC with $436 million in one-time pension funding over three years and increases UC’s base budget by 4% in each of the next four years.

Executive Vice President and Chief Operating Officer Rachael Nava chairs the twelve-person Retirement Options Task Force. That group is expected to make initial recommendations to the President by the end of the calendar year. Senate representatives are all members of the 2015-16 Academic Council: Chair Dan Hare (UCR), Vice Chair James Chalfant (UCD), UCPB Chair Shane White (UCLA), and UCFW Vice Chair Lori Lubin (UCD).

Per the budget agreement, the group will explore options for modifying UC’s Defined Benefit (DB) Plan to limit pensionable salary for new employees to the Consumer Price Index for All Urban Consumers: US City Average ($117,020 in 2015) established by the California Public Employees’ Pension Reform Act of 2013 (PEPRA).

Some faculty worry that the new options will hurt UC’s competitiveness. To the extent that the Defined Benefit plan helped attract top faculty to UC, retain them during their academic careers, and encourage their retirement at an appropriate age, a change may adversely affect faculty behavior.

The Academic Council has sent President Napolitano a statement expressing its concern about the decision to impose a cap and urging the task force to consider options that preserve the current value of benefits in the UC retirement system.

Professor Hare says he expects the Task Force to focus on ways to protect pension competitiveness for all employee groups, particularly faculty, including the possibility of giving certain employee groups access to a hybrid plan that combines a DB plan containing the PEPRA cap with a supplemental Defined Contribution (DC) Plan that would include an employer match.

“Our primary goals will be to ensure that neither the welfare nor total remuneration of employees is reduced by the 2016 retirement options,” Hare says. “We need to achieve both goals to maintain our competitiveness and ability to recruit and retain high quality faculty members. The Regents and the administration now understand that the value of UC’s benefits do not compensate for UC’s below-market salaries for faculty. Accordingly, we will be closely examining the proposed employer and employee contributions and the investment vehicles offered to employees under any new options. We also expect to examine the impact of the potential choice of DC or hybrid plans on the funding status of UCRP.”

Collectively, the Senate members on the Task Force have many years of experience with pension issues, including prior service on President Yudof’s Task Force on Post-Employment Benefits (PEB) which in 2009-10 made recommendations for a new UC Retirement Plan tier that applies to employees hired after July 1, 2013. That tier includes a 2.5% maximum age factor for all employees at age 65, an employer contribution of 8.1% of covered compensation, and an employee contribution of 7%.

Professor Chalfant, who served on the 2009 PEB Task Force, says the Task Force thought a lot about the relative merits of Defined Benefit and Defined Contribution plans and considered various ‘hybrid’ options, but concluded that a Defined Benefit plan is better for UC. He also says that the proposed cap on salary that can be used in pension calculations for the DB plan could easily change that conclusion.

“Whatever our benefits structure,” he says, “UC needs to be able to compete for the best new hires, and retain them once they are here. The PEPRA cap is obviously a new wrinkle, but using the same methods as the recent Total Remuneration Study, we also know that it is possible to develop either hybrid or Defined Contribution plans that provide a competitive pension benefit. At a minimum, the supplemental DC plan may be necessary to remain competitive, with a cap on pensionable salaries in the new DB option; of course that depends on many factors, such as the levels of contributions from both the University and employees, under either model.”

Hare says there is little or no possibility of backing out of the new options, as pension reform was the highest priority of the Governor and Legislature during the budget negotiations that led to the multi-year agreement.

“Given the strong expressions of concern by both the governor and the legislature that UC’s pension cap was more than twice the PEPRA cap, it comes as no surprise that the budget agreement requires UC to develop a pension option that is consistent with the PEPRA cap,” he said.

UCOP has created a website to provide updates and other information about the task force’s work.

The 12 members of the task force are: