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Saturday, April 10, 2010

Saturday, April 10, 2010

We Need a Better Faculty Position on the New Pension Plan

By Bob Samuels

I would like to suggest here what the UC’s faculty position on pension contributions should look like. First of all, we should only accept the new plan if they promise to put employees on the pension board, and they allow for a public hearing to study the handling of the investments. Here is my fear: we will pay in more money, they will take out an expensive bond, and then they will continue to invest the money in an ineffective manner.

Here are the historical issues:

1) the UC started underperforming comparable pensions (including CalPERS and CalSTIRS) after the management of investments were outsourced in 2000 (this outsourcing was pushed by a Regent, Gerald Parsky, who had a vested interest in the privatization of the investment management);
2) since the UC now has over 50 money managers, it can not effectively control or diversify its assets, and it has to pay huge fees, while these money managers may be betting against each other;
3) the Regents may be influencing the UC’s investments in order to support their own business interests (real estate, private equity, high finance, construction) – individual Regents could be doing this by influencing the choice of money managers;
4) Like CalPERS, what may be happening is that middle men are being paid to find external money managers that represent the interests of particular regents;
5) the UC increased its holdings in real estate and mortgage-backed securities right when the market was tanking; these decisions may have been influenced by the Regents who have strong holdings in real estate and financial securities;
6) the Regents and UCOP are hiding the ineffective management of the funds by claiming that everyone lost money during this period, and that the real problem is the contribution holiday (while the holiday is a problem, do we want to hand over more money so they can bet it on toxic assets and cater to the Regents’ business interests?;
7) In order to chase higher investment returns, the UC has increased its stakes in highly volatile areas (private equity, real estate, securities, hedge funds); these investment allocations have to be studied and monitored – (Harvard and Yale have brought in more of their investments in-house and are pulling out of private equity and other non-traditional investment vehicles);
8) the actuarial projections of the pension plans under-funding are based on many questionable assumptions, like the future rate of investment return (even with the mismanagement of the funds, the UC twenty-year average of 13% is way above the 7.5 rate the actuaries are using); Most public pensions are funded at 80%, and this is considered solvent, so why does the UC have to be at 100%?

I think we should support starting up contributions, but we should use our leverage to safeguard the investments. Also, while it seems that I am contradicting myself, by pointing to the low returns and the low rate of return used by the actuaries, I am arguing that we can maintain higher returns if we invest wisely.

I think we need to write letters to the chair of the Academic Council and the chair of the systemwide Senate's Faculty Welfare committee addressing these issues.


Aldo Antonelli said...

Michael, these are all great ideas. The outsourcing of the UCRP portfolio is one of the most obscure episodes in the history of UCRP (the way Patricia Small was forced to retire, the way the UC treasurer's salary skyrocketed from 200K to 800K in four years, the conflict of interests in the way the incentive program at Treasurer's office depends on recommendations by the same brokerage firms that are then hired to manage the portfolio, etc.).

I completely agree with your recommendations -- bring the investments back in house and put faculty and staff representatives on the board.

Michael Meranze said...

California Prof--Thanks. But the piece is by Bob Samuels. He deserves the credit for starting up the conversation. Hopefully others will respond to it as well.

cantab said...

The points made by Bob Samuels are important and his suggestions are reasonable. But, here are some additional relevant issues:

(1) If employees are added to the pension board, they will inevitably skew management in favor of the interests of current employees and retirees, rather than in favor of the mission of the university, potential future employees, etc.

UCRP is in better shape than other public pension plans because this has not happened yet: there have been no unfunded increases in benefit formulas, etc.

(2) UCRP should immediately cancel the lump sum cashout option. This option creates the risk of a "run on the bank" if employees perceive UCRP as in danger of failing.

(3) Defineed-benefit plans create "golden handcuffs" for long-serving employees, who are dissuaded from switching jobs. This is bad for the mission of the institution, which needs balanced incentives to stay and leave for all employees and faculty.

(4) Precisely because the 80s and 90s saw high investment returns, future returns will likely be lower. The crashes of the early 2000s and 2008 were not predictable. But zero returns for the whole decade was rather to be expected. The same is true for the next decade, given current asset price levels.

Aldo Antonelli said...

Oops. Well, here it goes: Bob, great points. Thanks for getting this started.

Aldo Antonelli said...

I also would like to reply to cantab:

(1) Employee reps would not be the only ones on the board. UC management (supposedly) would look out for the general interest of UC, which includes the welfare of future hires.

(2) The risk of a "run on the bank" is real, that's why UC should do everything it can to avoid that perception.

(3) Yes, defined benefit plan reward long-term employees. But see the "choices" report for a comparison of pros and cons of defined benefit vs defined contribution.

(4) This is the gambler's fallacy. Just because returns were higher in the past, it does not mean that they will be lower in the future. Sure, over the long run there will be a regression to the mean, but over the long run we'll all be dead anyways.

Unknown said...

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Gerry Barnett said...

I fail to see why UC "employees" who have teaching and research duties have less incentive to look out for the mission of the university than UC "employees" with administrative duties. With respect, that makes no sense, cantab.

Unknown said...

Everyone pays for everyone else’s pension one way or another.Probably true today but why is that necessary? Why cannot people save and pay for their own retirement.
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