Friday, April 3, 2015

Pension Tension

There seems to be much tension around pension investments. Blog readers will know that there has been a student push to divest from fossil fuel (coal, oil, natural gas). The Regents' response has been to say the portfolio will seek out green investments but will not divest unless it seems desirable to do so from a purely financial perspective. Recently, the smaller of the teacher unions in California, California Federation of Teachers (CFT), has been pushing CalSTRS - the state teacher pension - to divest from guns. (State Controller Chiang seems to have endorsed the CFT position.) The (much) larger Calif. Federation of Teachers (CTA) seems not to be involved, so there may be some inter-union rivalry involved.* There has also been legislative pressure on CalPERS and CalSTRS to divest from coal. (California has no coal but a lot of oil.) However, the umbrella organization of organized labor has been reticent due to concerns of union coal miners in other states.** At CalPERS, apart from divestment issues, there is a move to shift into less risky investments and raise contributions.***

Note that in principle none of these developments affect UC's pension fund directly due to the constitutional autonomy of the Regents and the university. But there is always political spillover. It's also worth noting that when you hear about other universities divesting from this or that, they typically are divesting from their endowments and not from pension funds because they don't have defined-benefit pensions and therefore don't have a trust fund for their pension program analogous to UCRP's. Defined-contribution pensions such as TIAA-CREF involve upfront contributions to individual tax-favored savings accounts. Individual participants then choose from a menu of investment options as they see fit. Defined-contribution plans can't be underfunded unlike CalPERS, CalSTRS, and the UC pension, so the question of making extra contributions to catch up with past underfunding does not arise. There's also no fiduciary pressure or responsibility to invest in what is deemed to be the best return-vs.-risk tradeoff for the plan.

There is no bottom line from this blog post except that the political environment is adding to the complications of running UC's pension system. When alternative pension options were considered, the Academic Senate and faculty generally were very supportive of the present defined-benefit system. Even when it was modified for new hires back in 2010, the basic defined-benefit structure was retained.  However, it could become increasingly difficult to sustain the system if political complexities continue to mount.
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