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'Risk shift': the future of defined benefits plans

26 October 2006

Berkeleyan pension coverage
Part 1: The holiday's over
Part 2: Many eyes on the pension prize

For Professor of Public Policy John Ellwood, an expert in financial management, public-sector budgeting, and budgetary-process politics, a pension fund's market performance is only half the story. A board member for the California Budget Project and a former consultant to the Congressional Budget Office and the U.S. Senate Budget Committee, Ellwood speculates that UCRP's funded status has declined, in part, because the university "took money out of the pension system during the good times in order to solve other problems."

He cites as example the early-retirement programs, referred to as VERIPs, offered to faculty and staff in the early 1990s to ease pressure on university operating funds at a time of deep state budget cuts. (More than 10,000 staff and 2,000 tenured UC faculty took advantage of these attractive offers.) As early retirees started drawing from the pension fund, Ellwood explains, "UC didn't have to pay their salaries on the operating budget, which is funded by the state through tax dollars."

But Ellwood also points to the wider stage on which the pension-contribution drama is playing out — one in which economic risk is being shifted from institutions to individuals and families (he cites The Great Risk Shift, a new book by Yale political scientist Jacob Hacker, as a touchstone on this topic). On the pension front that "risk shift" is reflected in "a whole movement of late in the United States … away from defined-benefit and into defined-contribution" plans.

"What the unions may eventually have to face, if the politics stay the same," he thinks, "is a situation where the state will come to them and say, 'You have a choice: We have a limited amount of funds. You can start contributing more to the defined-benefit plan, or we're going to switch you to a defined-contribution plan. Go to it, folks.'"

Ellwood also notes that healthcare costs — rising 3 percent above inflation each year — are even more risky and worrisome to employers than pension funding.
Union leaders may be reading the same books.

UC Davis lecturer Kevin Roddy, an officer in the American Federation of Teachers' branch for UC lecturers and librarians, thinks UC leaders are "honestly frightened, but not so much about pensions as about medical benefits." He worries that future changes to the latter "might hit workers harder and hurt us more."

Randy Scott, UC's head of benefits policy and program design, told a group of UC editors in September that the university will not discontinue retiree health benefits, though it could opt to change the level or type of health benefits it offers. (Retiree health benefits are funded by an "annuitant fee" leveled against all funding sources, not from UCRP.) Administrators' current anxieties about this benefit are driven not only by the rising costs of healthcare, he noted, but by new accounting rules that take effect Jan. 1.

"Under the new accounting system, we would show a [retiree health] liability of about $700 million more," he said, noting that, among other concerns, liabilities impact an institution's access to credit markets. "We will need to be able to demonstrate publicly how we are going to manage that liability going forward."