Looking Under the Egg

The latest “Our University” newsletter from UCOP has an article about the increase in pension contributions recently enacted by the Regents.  When you look at the newsletter, there is a illustrative “nest egg” illustration – shown above – which you click on to read the article.  Now it’s not clear what the chart below the egg shows.  But let’s hope the downward falling line on the chart under the egg isn’t the future funded status of the pension plan.  As readers of this blog will know, while back in the day, the plan was (more than) fully funded, the long pension contribution holiday, the effect of the financial collapse of 2008, and the ongoing demographics of the university have created a significant unfunded liability.  To deal with that liability, there need to be contributions (some combination of employer and employee) that cover the ongoing growth in the liability and amortize – over a multiyear period – the unfunded liability.  In theory, it is Regents policy to do just that.  In practice, decisions are made year-to-year and there is no firm commitment to ensure that policy is met.  It is assumed that the assets in the pension fund will earn 7.5% per annum over the long haul.  Thus, when contributions fall below policy, the plan is essentially borrowing from the future at an assumed annual interest rate of 7.5%.  It’s easy to shortchange the plan in any given year – it doesn’t run out of money to pay pensions – but 7.5% per annum is a steep rate of interest at which to borrow.

The newsletter is at http://ouruniversity.universityofcalifornia.edu/jul13/july13.pdf.