The Economist June 16 2006
The UC Retirement Plan (UCRP):
The Need for
Actuarial Best Practices &
Shared Governance Before
Contributions are Re-started.
UPTE conference
By Paul Brooks, UCB, former UPTE pension bargainer.
paul.brooks.upte@unwiredltd.com
Oct 16 2009
Acknowledgement
further information
• UC employees acknowledge Dr. Charles
Schwartz, emeritus professor UCB, for his
dedicated research on the UC pension system.
His work can be found at:
http://socrates.berkeley.edu/~schwrtz/
• Attacking the character of the reference writer
rather than the facts cited is an Ad Hominem
fallacy (described at
http://www.nizkor.org/features/fallacies/adhominem.html).
The Regents have stated that
contributions to UCRP are needed.
•
This presentation will conclude that:
•
The pension plan has been badly managed in the last 8 years.
•
That the pension plans must be managed to best actuarial practices, including:
•
a) Annual stochastic studies;
•
b) Readily available comparison data of fund performance with similar funds, including risk
assessment;
•
c) Readily available management cost data.
•
Employees should not have to contribute until UC has contributed enough to make up for the
shortfall due to CAP funds.
•
Shared governance with qualified trustees is necessary to ensure the pension fund is run
competently.
Forums in
UCRP are going
to be held on
campus in the
next two weeks
to get input from
employees. It is
important for
unions to
demand more
transparency in
the
management of
the pension
fund at these
meetings.
Location
Audience
Date
Time
Hastings College of the Law
198 McAllister St, LBM Lounge
All Groups
10/20
3:00pm - 5:00pm
Office of the President
Franklin Building, Room 10325
All Groups
10/21
1:30pm
UC Berkeley
Staff & Retirees
11/10
Faculty & Emeriti
11/10
UC Davis
Walter Buehler Alumni Center AGR Room
UCD Medical Center Cancer Center Auditorium
All Groups
All Groups
11/9
11/9
9:00am & 10:30am
2:00pm
UC Davis Reservation Instructions
Retirees: please notify the UC Davis Retiree Center at 530-752-5182 or by email to reserve a seat for any session.
UC Irvine
UC Los Angeles
Faculty Center, California Room
UC Riverside
Highlander University bldg, (HUB) room 302
UC San Diego
Faculty Club, Atkinson Pavilion
(By invitation only)
UC San Francisco
Parnassus, Toland Hall
Laurel Heights Auditorium
Parnassus, Toland Hall
11/20
Leadership Group
10/12
9:00am
Faculty & Emeriti
10/12
10:30am - 12:00pm
Staff & Retirees
10/12
12:00pm - 1:30pm
Faculty
10/19
10:00am - 11:30am
General
10/19
12:30pm - 2:00pm
Staff
10/19
3:00pm - 4:30pm
Staff & Retirees
11/12
9:30am
Faculty
11/12
1:00pm
Medical Center
11/12
3:30pm
Faculty
Retirees
Staff
10/22
10/22
10/23
12:00pm - 1:30pm
3:00pm - 4:30pm
12:00pm - 1:30pm
Definition of terms
• A DBP is a defined benefit plan.
At retirement, employees are guaranteed a certain
retirement pay for the rest of their lives. It is the
responsibility of the retirement fund, usually managed by
the employer, to guarantee this.
• A DCP is a defined contribution plan.
At retirement, an employee has only the funds he has
saved in instruments savings plans such as a 403B or
401K. There is no guarantee of a specific retirement
benefit.
Pension history
• During the 1980’s various other acts were
passed that made DBP much less
attractive to employers. Most dismantled
their plans.
• In 1979 80% of all workers with a pension
were covered by a DBP.
• By 2004 only 20% of employees in private
firms were in DBPs.
Source: Rasmus, J. 2005. The war at home. Kyklos productions, LLC.
New state employees could have
lost their DBP pensions.
• In 2005 the Governor proposed that
on July 1, 2007, all new hires would
be on a 401K (DCP) plan.
• It is only union pressure that is
preventing this.
DCPs a poor substitute for DBPs
• 401Ks (a DCP) have underperformed DBPs.
• To retire at 65, a person should have 8-9 times
their annual salary in a 401K.
• Most employees with 401Ks are not contributing
enough.
• Part of the problem is that employers only match
the employees contribution, say 3%/3%, or
6%/6% at best.
• DBPs historically have had a split more like 3%
employee/ 8-15% employer.
Hacker, J. S. 2006. The great risk shift. Oxford Univ. Press.
Rasmus, J. 2005. The war at home. Kyklos productions, LLC.
Pension we have at UC.
• We are very fortunate to have a well
funded DBP and a DCP at UC.
• The DBP is a great benefit that helps to
make up for lower wages.
• It is great for the taxpayer, as no public
money has been put in to the DBP in 17
years.
• 2% of our pay also goes into a DCP which
is separate from the DBP.
DCP’s are not adequately funded
• “Employers have taken advantage of the
switch from DB to DC to cut the level of
their payments drastically.”
• “In America total (employee and employer)
DC contributions at the last estimate were
… still only 9.8%.”
• “The trouble with pensions” p.93, in: The Economist, vol. 387 No.
8584. June 14th – 20th , 2008.
The Result:
• It makes sense for employers to switch from a
DBP to a DCP to save money.
• It is hugely profitable for the investment industry
to then manage this money for the average
employee. They want this change to occur.
• The average employee will have a very small
pension since they and their employer do not
contribute enough to their DCP. They can be
charged excessive fees, and their DCP does not
earn a high interest rate.
Coincidences?
• In 2005, the governor proposed that all new state
employees be put on a 401K beginning July 1, 2007.
• The proposed date of the re-start of contributions was July
1, 2007.
• The first proposed contributions of 8% each were the
same split as a 401K.
• To the claim “UC wants to create a ‘two-tier’ retirement
plan or replace the pension with a 401k plan,” the
response is “Right now, the Regents are discussing
options for keeping the UCRP healthy through
contributions. In the future, the Regents may consider
making other choices available to employees.”
UCRP historical contributions.
• Note on the next slide that historically the
contributions to the pension plan were 2-3% by
employees and variable, but as high as 16% in
the 1980’s.
• In 1990, the fund was so overvalued that
contributions were stopped. The 2% employee
contribution was put into a DCP account.
• UC contributions not only stopped but money
was taken out for the CAP I and II instead of cost
of living increases. UC employees were told
they would never have to contribute again.
Historical and proposed UC pension contributions
20
Regents &
UCOP have
discussed
employee and
employer
contributions
increasing to
5/11% split
(2007)
% contribution
15
10
5
0
Employer
Employee
-5
CAP 1
-10
1979.0
1989.0
CAP 2
1999.0
2009.0
2019.0
year
References: Historical section based on UC’s response to an information request, 2006
CAP 1 -Back calculated from CAP 1 held by Paul Brooks
CAP 2 -http://atyourservice.ucop.edu/employees/retirement/cap/index.html
UC Retirement Contributions
20
historical
discussed
15
% contributions
10
Employer
5
0
1980.0
Regents &
UCOP have
discussed
employee and
employer
contributions
increasing to
8% each.
(Schwartz Oct
2008).
Employee
1990.0
2000.0
2010.0
2020.0
-5
CAP 1
CAP 2
-10
year
References: Historical section based on UC’s response to an information request, 2006
CAP 1 -Back calculated from CAP 1 held by Paul Brooks
CAP 2 -http://atyourservice.ucop.edu/employees/retirement/cap/index.html
UC was top performing fund.
• In the 1990’s the UC retirement fund was
one of the top performing funds in the
nation.
• Therefore contributions did not need to be
re-started.
• It was managed at low (probably 0.1% of
assets) in-house.
• The manager was Patricia Small.
Pension fund management change
continued.
• In the late 1990’s, Regent Parsky organized of closed
(secret) meetings where Russ and a consultant, Wilshire
Associates, critiqued the fund performance.
• The California Supreme Court ruled these meetings
illegal in 2003.
• S & P performance was fabricated and risk assessment
was not evaluated.
• Many of the calculations that Russ used were incorrect.
• The supposed loss to the pension fund only amounted to
0.2% per year (less than many management fees)
•
http://socrates.berkeley.edu/~schwrtz/ “what’s happening to the pension
fund parts 1-20”.
Patricia Small loses her job.
• In 2000, the regents retired Patricia Small
with a generous severance package that
included a clause that she was “not to
disparage the regents”.
• Wilshire Associates donated $80,000 to
the Elect George W. Bush campaign that
Regent Parsky was managing.
• http://www.eastbayexpress.com/gyrobase/parsky_s_part
y/Content?oid=426427&page=3
Regents & Conflict of Interest: The Need
for Joint Governance of UCRP
• In 2000, the first $16 billion of
UCRP assets was handed to
outside management on the
advice of Wilshire Associates,
who had been hired to advise
the University.
• Wilshire Associates had
donated money to the “Elect
George W. Bush” campaign in
California, which was managed
by Gerald Parsky.
• Gerald Parsky denied any
connection with this donation.
http://sfgate.com/cgi-bin/article.cgi?f=/e/a/2000/07/16/NEWS9974.dtl&hw=UC&sn=001&sc=1000
Wilshire associates given job
• Wilshire associates was given the job of
making the changes it had recommended
(a clear conflict of interest).
• http://www.eastbayexpress.com/gyrobase/parsky_s_part
y/Content?oid=426427&page=3
• In Nov. 2000, UC traders sold nearly $11.6
billion in stock. (Who got the commission
on that?)
• http://www.eastbayexpress.com/gyrobase/parsk
y_s_party/Content?oid=426427&page=4
Regents & Conflict of Interest: The Need
for Joint Governance of UCRP
• In 2003, Wilshire Associates was found to be illegally “fast
trading” by the SEC.
• There were many other business practices that are not in
the best interest of the client.
• Did the fund perform better after 2000 when the UCRP
management changed?
• We will need another 5 years of data to make a better
determination, but when compared to CalPERS, the
University pension fund is not performing as well as in the
1990s (see next slide).
UCRP CalPERS comparison of returns
return
Private management began
30
25
20
15
10
5
0
-5
-10
1990
Bond fund privatized
UCRP
CalPERS
UCRPCalPERS
zero line
1995
2000
year
2005
2010
Reference: compiled from the table on page 7 of
http://socrates.berkeley.edu/~schwrtz/UCRP_Data&Q
uestions.pdf
We need Peer Comparisons!
• This information is not readily available.
• These peer comparisons should be put on
the UC web page as soon as they are
available.
• We need this data regularly and publically
available.
Main faculty and staff concerns.
• Has the management of the pension fund
used actuarial best practices?
• Have there been conflicts of interest
managing the pension fund?
• Does the fund actually require the start of
contributions?
• How much money has been removed from
the pension fund for management fees?
Models & Manipulation:
The need for actuarial best practices.
• The claim that the pension fund needs to re-start
contributions is based on actuarial models that
try to predict what the liabilities of the fund are.
• They require projections of input variables
including:
–
–
–
–
–
Life expectancy
Inflation
Pay increases
Number of new employees and their starting salary
And about 20 other input variables.
Models & Manipulation
1.
Actuarial models are subject to considerable manipulation in their
input data to generate a desired outcome.
2.
This presentation will show an example of how Social Security
data was misquoted during the President’s campaign to “save”
Social Security. This will show how the effect of data ‘propagation
of error’ carries forward and can be abused.
3.
This presentation will show how different assumptions made by
actuarial firms make a huge difference in the projections for the
retirement fund.
4.
This presentation will conclude that the reporting standards in
UC’s recent actuarial reports should be upgraded to actuarial best
practices. This should include the ‘propagation of error’ and the
sensitivity of the actuarial model to different inputs.
Propagation of Error in Models
• Models are usually computer programs that try to predict
something based on past experience.
• Models input a large number of variables, and then
attempt to predict the outcome.
• Models can be manipulated by not showing data from
different projections.
• All projections must have a “propagation of error” to be
valid.
• This is just as true for pension projections.
`
`
`
`
Models & Manipulation:
Social Security Privatization
• In 2005, President George W. Bush
campaigned to create private accounts in
Social Security, claiming with absolute
certainty that Social Security would be “flat
broke in 2041”.
• The following graph is the actual data as
predicted by Social Security in 2004. This
is a thorough analysis called a “stochastic
study”.
assets / annual costs
Models & Manipulation:
Social Security Privatization
Source: Hiltzik, Michael. 2005. The plot against social security. Harper Collins. ISBN 0-06-083465-X. p. 60.
Models & Manipulation:
Social Security Privatization
• The real figures are that Social Security will go
bankrupt between 2030 and infinite, that is,
never!
• Note that in this 2005 projection, the Social
Security fund will stop accumulating assets and
have to pay out more than it takes in around
2018.
• Has this always been the case? How well have
past projections predicted this point?
Models & Manipulation:
Social Security Privatization
Year
Projection
Made
Year
Social
Security
projected
to begin
deficit
spending
Difference
from year
projected
to
projection
1991
2010
19
Hardy, Dorcas R., and C. Colburn Hardy. 1991 Social Insecurity. Villard books, New York
2001
2014
13
http://www.csss.gov/meetings/june-11-minuts.htm
2004
2018
14
Hiltzik, Michael. 2005. The plot against social security. Harper Collins.
• Every year the projections are updated and the model checked.
• Note how past projections have been pessimistic and the predicted
date that Social Security will go into deficit spending keeps
advancing into the future.
Regents & Conflict of Interest: The Need
for Joint Governance of UCRP
•
Gerald Parsky is a UC Regent &
UCRP trustee.
•
Parsky was a member of the
President’s Commission to
strengthen Social Security in 2001.
•
Members of the commission were
chosen on the basis that they
favored the creation of private
accounts, and the commission was
charged with recommending
private accounts.
•
This raises serious questions as to
the Regents’ objectivity on pension
matters.
http://www.csss.gov/meetings/june-11-minutes.htm
UCRP: Different Assumptions
Result in Different Projections
Note:
Towers and Perrin’s study projects assets/liabilities of 204% in 2019:
Wilshire’s study projects assets/liabilities of 118% in 2020.
Dr. Schwartz asked why was there a discrepancy between the 2 studies.
Source: http://socrates.berkeley.edu/~schwrtz/WHPF6.html
Dr Schwartz eventually received the following reply to the discrepancy:
University of California
Office of the President
April 16, 2001
Dear Professor Schwartz:
I am following up on your concern about the differences between Wilshire
Associates and Towers Perrin in comparing respective asset and liability
projections for the University Retirement System. The differences in
funded level projections relate to differences in assumptions and not to
discrepancies in the models. Given the same inputs both the Wilshire and
Towers Perrin models produce nearly identical results. The important
differences are:
1. Lump Sum Distributions: Wilshire assumed no lump sum distributions
while Towers Perrin assumed a 20% lump sum election. The effect of lump
sums is to reduce assets and liabilities in equal dollar amounts and, as a
result, Towers Perrin's liability projections will be lower than Wilshire's and
its ratio of assets-to-liabilities will be higher. This difference in assumption
explains about half of the difference in projected liabilities in year 2015 and
almost all of the difference in projected assets.
continue on next slide
http://socrates.berkeley.edu/~schwrtz part 9
2. New Entrant Age and [Salary]: The remaining difference in liability
projections is explained by assumptions made for the average age and
salary in new entrants. This became a particularly important input given the
assumed 2.5% growth in the active workforce. Wilshire assumed new
entrants would come in at a significantly higher age and salary than did
Towers Perrin, a difference that caused a more rapid growth in Wilshire's
liability projections. This age and salary assumption difference fully explains
the remainder of the difference in 2015 liability projections.
One purpose for the Towers Perrin liability study was to bring greater
accuracy to the liability projections and to use their findings to further
examine asset allocation for the retirement plan. Wilshire reports that
although the Towers Perrin study shows a stronger projected funded
position for the retirement plan compared to their study, their asset
allocation recommendation at the time would not have changed.
Thank you for your interest in this topic. I hope this addresses your
concerns.
Sincerely,
Joseph P. Mullinix
Senior Vice President -- Business and Finance
http://socrates.berkeley.edu/~schwrtz part 9
UCRP: Different Assumptions
Result in Different Projections
• This shows the sensitivity of the actuarial model.
Adjusting the lump sum distribution from 0 to 20%, and
changing the age and salary of new hires, changes the
projected funding status of the pension fund from 118%
to 208%!
• Sensitivity analysis is required to meet actuarial best
practices.
• This also shows how easy it is for an actuarial firm to
change the results of their projections. This can easily
be subject to pressure on the actuarial firm to come up
with the results that the group funding the actuarial firm
wants to believe.
UCRP: Different Assumptions
Result in Different Projections
• What are the
assumptions used in
the following graph?
UCRP Funded Ratio Projection
Segal Co., Nov 2005 Regents Presentation
• What is the model’s
sensitivity to inputs?
• Where are the error
bars?
Source: http://www.universityofcalifornia.edu/news/
ucrpfuture/welcome.html
UCRP: Different Assumptions
Result in Different Projections
A Stochastic study is normally done every 3
years and was due in 2006. Why is there no
updated Stochastic Study on UCRP?
“While we appreciate your advice on ‘best
practices,’ our actuary, the Segal Company, feels
that a stochastic study in this case would
introduce many variables into the analysis that
would unnecessarily complicate the picture.”
–UC response to Venuti Report, May 26, 2006
Actuarial Best Practices & UCRP:
The Need for Joint Governance of UCRP
• Segal and Company claim that the data is proprietary. Venuti &
Associates have offered to take this issue before the actuarial board
of counseling and discipline, where they are confident that they will
rule that although the programs that Segal use are proprietary, the
data is not.
• When this data is released, Venuti & Associates can do a thorough
analysis. However, this would have to be paid for.
• The Regents do not appear to realize that sensitivity to input data
and propagation of error need to be recognized in actuarial models.
This means that :
Shared governance of the UCRP is needed to protect
the interests of Plan participants.
Actuarial Best Practices & UCRP:
The Need for Joint Governance of UCRP
•
This data and statement by Segal is totally unacceptable for the standards at the
University of California.
•
The data must be represented with a detailed report on the sensitivity of the model to
various inputs and a report of how realistic these inputs are, meeting actuarial best
practices standards, with peer review.
•
Any actuarial work not done to these standards should be dismissed and the actuarial
firm’s contract discontinued.
•
Arguments that the cost of running the model with different inputs would be too costly
are not credible for a fund the size of UCRP.
•
The Unions bargaining over the pensions have hired their own actuarial firm, Venuti
and Associates, who have recommended doing a more thorough analysis.
•
In a response to a critique of their work by Venuti and Associates, Segal and Co.
have recommended that the unions should do their own actuarial study. In 2006 UC
would not release the data for Venuti and Associates to do this.
UCRP Management & Performance:
the need for Joint Governance
• It is possible that the lower return for UCRP since privatization is a
result of increased management fees.
• Before the fund was privatized, the cost of management was around
$20 million per year, or 0.1% of the fund.
• Management fee of 0.36% is now probable but the information is
difficult to get. http://socrates.berkeley.edu/~schwrtz/UCRPFees.html
•
“Most investors are paying much more than they think they are”
(Consumer Reports Money Adviser, Feb 2007 p.6).
• If extra management fees are 0.36-0.1=0.26%, this would cost the
about $100 million more than under UC management.
• Joint governance would provide more oversight to determine the
extent of these possible fees and cost to UCRP.
CAP funds
• In the early 1990’s and 2000’s the state was
short of money and did not provide much money
for a cost of living pay increase.
• Since the pension fund was so overfunded, the
Regents took money out and put it into a
“Capital Accumulation Provision” account for
each employee, instead of a cost of living
increase. CAPs are managed by the pension
fund, but separate and not included in pension
assets.
UC Retirement Contributions
Regents &
UCOP have
discussed
employee and
employer
contributions
increasing to
8% each.
20
historical
discussed
15
% contributions
10
Employer
5
0
1980.0
Employee
1990.0
2000.0
2010.0
2020.0
-5
CAP 1
CAP 2
-10
year
References: Historical section based on UC’s response to an information request, 2006
CAP 1 -Back calculated from CAP 1 held by Paul Brooks
CAP 2 -http://atyourservice.ucop.edu/employees/retirement/cap/index.html
UCRP Management & Performance:
the need for Joint Governance
• Had this money not been removed from the fund, it
would have at least $1.2 billion more than it does now.
The actual figure is higher as employees who have
retired since the CAPs were approved have taken this
money out.
• CAP I earns 8.5% interest, CAP 2, 7.5% interest.
• This means that if employees have to pay into the Fund
before this money is paid back, then the employees are
paying for their own CAP 1 and 2 pay raise, with interest.
UCRP Management & Performance:
the need for Joint Governance
• UCOP & The Regents have discussed increasing
contributions.
• In 2006 to eventually to a 8/8% split for employee and
employer.
• In 2007 to eventually to a 5/11% split for employee and
employer (after union pressure).
• Dr Schwartz has heard that 2008 the talk if back to 8/8%
split for employee and employer.
• Equal contributions are not consistent with UCRP
contributions history. Before the “holiday,” employees
generally paid 2-3%, and UC paid the rest, up to 16%,
depending on liabilities and the performance of the Fund.
Qualify the Trustees
• A complaint often made on the concept of joint
governance is that employee trustees are not
competent trustees.
• In Britain it is now the law that pension trustees
must be qualified before they can serve. This
requires a course of several days time.
• ttp://www.thepensionsregulator.gov.uk/trustees/trusteeKnowledge/in
dex.aspx
• UC Should take the lead in establishing a
qualification program in the United States.
The Regents have stated that
contributions to UCRP are needed.
•
Conclusions
•
The pension plan has been badly managed in the last 8 years.
•
The pension plans must be managed to best actuarial practices, including:
•
•
•
a) Annual stochastic studies;
b) Readily available comparison data of fund performance with similar funds, including risk
assessment;
c) Readily available management cost data.
•
Employees should not have to contribute until UC has contributed enough to make up for the
shortfall due to CAP funds.
•
Shared governance with certified trustees is necessary to ensure the pension fund is run
competently.
Legislation on the pension
• In 2007 the legislature passed Senator Yee’s
SRC 52 resolution for shared governance of the
pension plan.
• The regents have ignored it.
• In October 2008 AFSCME in conjunction with
senator Yee would start collecting signatures for
a ballot initiative to create a board of trustees for
the retirement fund.
•
•
http://www.mercurynews.com/breakingnews/ci_10489815?nclick_check=1&
forced=true
http://www.californiaprogressreport.com/2008/09/fairness_for_uc.html
This attempt appears to have failed!
What can we do?
• At the coming forums, ask what management fees are.
• Ask what a peer comparisons of return for UCRP is
compared to similar funds like Calpers.
• Ask why stochastic evaluations of the fund are not being
done.
• Ask why we are now being asked to pay 5% when the
maximum we used to contribute was 3%.
• What conflict of interest do the regents have?
• Why should we start contributions before the CAP funds
are paid back?
How to carry to public and members.