What's Happening with the Pension Fund? -- Part 26

by Charles Schwartz, Professor Emeritus, University of California, Berkeley
schwartz@physics.berkeley.edu                                        February 23, 2010
>> This series is available on the Internet at   http://socrates.berkeley.edu/~schwrtz

- - -  Updates on a Few Topics  - - -

An Inch of Progress in Pension Fund Disclosures

     The 2009 Fiscal Year (FY) annual report of the UC Treasurer has just recently been published and something remarkable was discovered. At the bottom of page 27, in one of seven footnotes to the table of Annualized Total Returns for the University of California Retirement Plan (UCRP), one reads:
For FY 2008-2009, the cost of managing the UCRP was 61 basis points. This is comprised of 52 basis points attributable to external money managers and 9 basis points to UC's internal costs. These 9 basis points consist of 5 basis points related to administrative costs and 4 basis points related to investment management and custodial expenses.

     No such comprehensive  information has ever been published before. The previous year's annual report had only this information placed in that same footnote:
...the Treasurer's Office investment management and administrative expenses (currently 0.039%) of average annual market value.

     One basis point is 0.01%. So that 0.039% figure from last year's report matches the 4 basis points found in this latest report. Those additional 5 basis points "related to administrative costs" probably covers things outside of the Treasurer's Office, such as the HR department that manages retiree affairs. So the big new disclosure is the "52 basis points attributable to external money managers."

     How much does that amount to in dollars spent?  The total assets of UCRP were $42 billion at the end of FY 2008 and $32 billion at the end of FY 2009. So, taking the average of those two numbers, I estimate:
 $192 million  Fees paid to external money managers
 $  33 million  Internal expenses
 $226 million  Total Expenses paid by UCRP in FY 2009

     Now, anyone may have an opinion about whether that $200+ million was well spent or not.  What I am celebrating here is the fact that this is the very first time that such data has been presented to the public, and to the members of UCRP. One can see, from the data shown on page 4 of this report, that the Internal expenses have been previously listed in the UCRP annual reports; but the Fees paid to external money managers have never been publicly acknowledged before.

     Nevertheless I have been able to get that data in recent years by means of a formal request under the California Public Records Act; and some of that information has been posted on my web site.  For FY 2007 UCRP paid fees to external money managers amounting to 28 bp and for FY 2008 it was 31 bp.  So this latest data, for FY 2009, shows a surprising jump up to 52 bp.  What is the story here?

     At the November 2007 meeting of the Committee on Investments, the Treasurer reported that too many of the active external money managers were just replicating the benchmarks; and thus paying them fees was just a waste of money. Is that still true?

The Ongoing Battle for Transparency

     For several years I have been asking The Regents to provide more information in the routine reporting by their Treasurer's Office. I pointed out that such reporting was entirely customary in most investment organizations. I particularly noted how much more information is provided in CalPERS' annual and quarterly reports.

     There is a detailed letter I wrote, on September 18, 2007, to Regent Paul Wachter, Chair of the Regents' Committee on Investments. it was never answered.  As reported in the official Minutes of that committee's meeting on August 16, 2005, I made formal proposals to them for improved disclosure, including data on fees paid to external money managers. No response.  And in my "What's Happening with the Pension Fund - Part 19" (issued 10/29/2003) I also spoke in some detail about this same issue.

     So there is six years' delay in getting the "responsible" parties to start acting on just one absolutely normal thing.  I am still waiting for disclosure on several related topics:
• Performance of individual external money managers
• Detailed report on fees paid to each external manager and consultant
• Commissions paid out
• Routine publication of peer group comparison data

     This last item deserves some particular attention. The Regents' Treasurer posted a paper, based on her talk to a faculty committee on February 13, 2009, with the title, "UCRP Peer Comparisons," which questioned the usefulness of peer group comparisons. Yet, in her latest report to the Regents' Committee on Investments (2/23/10), she provides a slide show that includes some peer comparison data and notes that they show "Top Quartile performance". Looking at total returns for the one-year period ending 12/31/09, compared to the peer group of Master Trusts with over $1 Billion in assets, UCRP ranked at the 20th percentile.  That indeed looks very good. However, I also have that same comparison data as of one year ago: at 12/31/08 UCRP performance ranked at the 80th percentile of that same peer group. That looks very bad (down in the bottom quartile). Does this new practice evince a change in disclosure policy or is it just cherry-picking?

Resumption of Contributions to the Pension Fund

     This topic has been under continual discussion for a few years now. The Regents and their executive staff talk a lot but they have been very slow to do anything, blaming the State of California for all their problems.  It is true that Sacramento has lately denied UC's budget requests to fund the state's share of employer contributions to UCRP. But state funding is only a minor component of all salaries and wages paid to UC employees. (Looking at the latest Compensation Report posted by UCOP, State General Funds account for only 21.5% of UC's total pay for CY 2008.)

     It is worth noting that in the past UC had arranged for an installment payment plan when the state was unable to come up with its scheduled contribution to the pension fund. (See UC Annual Financial Report for 2000-2001, page 38.)

     In June 2009, the Academic Council approved a report from its Task Force on Investment and Retirement and passed on to President Yudof the recommendations that contributions to UCRP be resumed quickly, at an accelerated pace, and with a schedule of 9.5% payments by the employer and 2% payments by employees.  I am unaware of any official actions taken in response to those recommendations.

Some Collected Data of General Interest

graph of UCRP assets over time

Summary Statement Data from Annual Reports of the University of California Retirement Plan
                                                      Fiscal Year --->
2008-09 2007-08 2006-07
Net Assets $32.3 b $42.0 b $48.1 b
Net Investment Income (Loss)
($7.9 b) ($2.6 b) $  7.9 b
Benefit Payments* $  1.6 b $  1.5 b $  1.3 b
Plan Administration and Other Expenses
$32.4 m $36.6 m $38.9 m
*excluding member withdrawals and lump sum cashouts

Active Plan Membership
Senate Faculty and Non-Faculty Academics
Management/Senior Professionals   8,536
Professional/SupportStaff 84,691
Total 115,745
Average Annual Salary
Senate Faculty $113,915 $110,479 $103,890
Non-Faculty Academics $ 73,967 $ 71,735 $ 66,826
Management/Senior Professional $119,499 $117,317 $112,608
Professional/Support Staff $ 58,778 $ 56,391 $ 57,326
Average Age
Senate Faculty 50 y
50 y
50 y
Non-Faculty Academics 44 y
44 y
44 y
Management/Senior Professional 49 y
49 y
49 y
Professional/Support Staff 43 y
43 y
43 y

Retiree Membership
Faculty 4,721
Management/Senior Professional 6,829
Professional/Support Staff 31,419
Total 42,969
Average Retirement Age

Faculty 63 y
63 y
63 y
Management/Senior Professional 60 y
60 y
60 y
Professional/Support Staff 59 y
59 y
59 y
Average Service Credit at Retirement

26 y
26 y
26 y
Management/Senior Professional 22 y
22 y
22 y
Professional/Support Staff 20 y
20 y
20 y
Average Annual UCRP Income

Faculty $68,352 $65,832 $63,528
Management/Senior Professional $46,452 $49,248 $47,616
Professional/Support Staff $27,684 $26,712 $25,116

Survivor/Beneficiary - # of recipients
Disabled - # of recipients