Contributions to UC pension fund set to restart

At the University of California, April 15, 2010 marks a financial watershed: the restart of contributions to the UC Retirement Plan (UCRP). On that day, the university will begin making regular contributions to the retirement fund. Then, on May 1, employees will follow suit. Most employees will contribute 2 percent of gross earnings, while the university — with funds coming from contracts, grants, the state (hopefully) and all of other salary sources — will contribute 4 percent of each payroll.

Initially the new requirements will have no impact on the take-home pay of faculty and staff; their contribution will take the form of a “redirect” of money that had been deposited automatically each month into each employee’s Defined Contribution Plan (DCP) pretax account. Depending on when one is paid, the first redirect, from May earnings, will appear on UC Berkeley employees’ May 23, June 1, or June 8 pay check.

Union-represented employees’ contribution is subject to collective bargaining. Employees in all unions except CUE and UAW will begin contributions to UCRP, along with other staff and faculty, on May 1.

Gradual contribution ramp-up

In order to sustain the pension fund, both employer and employee contributions are expected to increase over time — beginning, most likely, in July 2011.

What might the ramp-up in contribution levels look like? UC has said it intends to pursue a long-term approach similar to that of CalPERS, the retirement program for California state employees (and the biggest public retirement plan outside of Social Security). Most CalPERS working members currently contribute 5 to 7 percent of gross pay to their retirement fund (Gov. Schwarzenegger has proposed raising that to 10 percent), while the state contributes 16.9 percent. In the case of UCRP, Gary Schlimgen, UC director of pension and retirement programs, noted in a recent online Q&A that to cover the fund’s growing liability, UC and employees eventually need to contribute, together, about 17 percent of pay annually.

Why restart contributions?

UCRP is funded by investment returns and, when applicable, employee and/or employer contributions. When a contribution holiday was announced in the early 1990s, the plan had a large surplus, with a “funded ratio” or “funded status” (assets vs. current and future obligations) that reached 161 percent at its peak. For every dollar it was committed to paying out, that is, it had $1.61 on reserve.

That was then. Like many pension funds across the country, UCRP’s funded status has dropped since its heyday, and took a hit during the stock market downturn triggered by the recent U.S. financial crisis. According to an actuarial valuation of UCRP presented to the regents this fall, the plan’s funded status as of July 2009 was 95 percent. UC analysts say that the erosion is likely to continue. Schlimgen, at a November town hall at Berkeley with the Presidential Task Force on Post-Employment Benefits, warned that if UCRP continues on the present course, without contributions, its funded ratio is projected to decline to 61 percent by 2013.

The Task Force on Post-Employment Benefits is currently studying UCRP, with an eye to its long-term sustainability. In April, members of the group plan to visit each UC campus to discuss the broad range of recommendations they are considering and solicit feedback from the UC community. Its visit to Berkeley is slated for April 20. (It will meet with staff and staff retirees from 10 a.m. to noon in Pauley Ballroom, Martin Luther King, Jr. Building. The meeting with faculty and faculty emeriti will be from 2 to 4 p.m. in Sibley Auditorium, Bechtel Engineering Center; staff and staff retirees are also welcome at this session.)

The task force is expected to issue recommendations, in early summer, on the size and pace of contributions needed to sustain the UC retirement fund over time. Then it will be up to the UC Regents, and collective bargaining with UC unions, to hammer out next steps for funding UCRP into the future.

Digging deeper

More background on UCRP and the restart of contributions to the fund:

•  Facts about restarting contributions to the UC Retirement Plan (03-29-10 UCOP ‘Our University’ newsletter factsheet)
•  Answers to your questions about the restart of pension contributions (02-22-10 UCOP interview with Gary Schlimgen)
•  Future of the UC Retirement Plan (UCOP website)
•  Report illustrates decline in UC Retirement Plan; need for contributions (11-20-09 UCOP news article)
•  UCRP actuarial valuation report (10-09 Segal Group analysis of fund’s obligations and assets; 58-page pdf)
•  The holiday’s over (10-06 two-part Berkeleyan article)