A tale of two actuaries
26 October 2006
|Berkeleyan pension coverage
Part 1: The holiday's over
Part 2: Many eyes on the pension prize
Speed is of the essence, UC administrators say, calculating that delaying the restart of UCRP contributions just one additional year will cost an additional $1.6 billion by 2015, as payouts to a growing cohort of retirees outstrip the fund's asset growth through investment earnings. Critics respond — some on advice from expert consultants, others on the strength of their own calculations — that UCRP is not in imminent peril, or at least that employees need more convincing analysis to prove that case to them and win their allegiance to the regents' plan.
One source of expertise, which now figures prominently in union literature, is a report issued by Venuti & Associates, a Los Altos-based actuarial firm hired by several unions to review the regents' financial analysis of the retirement fund. In a seven-page letter dated June 27, 2006, Venuti raised methodological concerns about UC's analysis of the pension plan, arguing that it had failed to conduct a "robust funding analysis" to document and justify its call for contributions.
For instance, UC had assumed an overall annual investment return of 7.5 percent in making its calculations; it was plausible, Venuti said, to expect returns of 10 to 11 percent — which would be enough, by its calculations, to prevent a decline in UCRP's funded ratio. It charged that UC's actuaries should have used more sophisticated methods in making their calculations and ought to have analyzed how the pending spin-off of Los Alamos National Lab employees would affect UCRP's funded ratio.
Citing what it called "the lack of an impending crisis" for UCRP, Venuti concluded that "the Regents, as fiduciaries of the $42 billion fund, have not had the benefit of projections and analyses that would constitute best practices for making this type of decision."
In response, UC commissioned its own actuaries, the San Francisco-based Segal Company, to review Venuti's findings. In a 10-page report dated Aug. 9, 2006, Segal called Venuti's analysis and conclusions "severely flawed." It claimed that the unions' actuary had failed to address the substance of the regents' plan — which is to "provide for a more gradual and predictable transition from no contributions to full contributions" by starting contributions before the surplus runs out and stepping them up gradually. Instead, it wrote, Venuti "cites 'the lack of an crisis' to justify delaying starting contributions at any level" and "recommends additional analyses and projections … to pin down the probable timing of when the surplus would be exhausted….Because the Regents ... have adopted a well-advised policy of not waiting for that event, these additional analyses are in no way essential to the process," Segal wrote.
Segal also challenged, as unrealistically optimistic, Venuti's claim that UC could safely assume future investment returns of 10 or 11 percent. "[F]or a balanced retirement plan portfolio like UCRP's, no actuary (including Venuti), economist, or investment consultant would recommend a 10 percent investment-return assumption for setting or planning future contribution rates."
"Clearly, the need to restart contributions is a watershed event in the history of UCRP and its members," Segal said, "justifying the great amount of study by the regents and interest from the members that it has generated." But the Venuti report, it wrote, "will not advance the Union Coalition's or other interested parties' understanding of the issue, because it does not address the substance of the Regents' policy" but instead raises "misleading and peripheral issues."