Sunday, March 18, 2007
Good News (for a change) for UC Retirees at LANL
ROGER SNODGRASS, Los Alamos Monitor Assistant Editor
The University of California Board of Regents unanimously authorized completing an agreement with the Department of Energy on Thursday to meet ongoing obligations for UC retirees and inactive former employees of Los Alamos National Laboratory.
The recommendation from President Robert C. Dynes included a plan to transfer $1.279 billion of pension assets to Los Alamos National Security, the new contract manager. The remainder of $3.17 billion will be retained by the UC Retirement Program to manage and fund liabilities of the LANL employees who retired or became vested inactive members of the program before the contract changed hands.
UC spokesman Chris Harrington confirmed the approval on Friday. He said the university had delivered on its promise to protect the interests of the UC retirees at LANL.
Charles Mansfield, president of the LANL Retiree Group, said the deal looked good except for one thing.
"We haven't heard DOE say that," he said
A call to the contract officer at the local National Nuclear Security Office that supervises the laboratory contract for DOE was not returned on Friday afternoon.
A fact sheet prepared by UC to explain the transactions represents two fully mature and negotiated agreements ready for formal completion.
The transfer of UC assets and liabilities "is planned to occur on or about April 2, 2007," according to the information.
Earlier in the week, UC alerted laboratory employees and retirees that the closeout agreements would be considered during the regents' meeting this week in Los Angeles.
It has been a roller-coaster couple of years for retirees who found themselves alternately reassured and powerless in the process.
Their concerns emerged when the request for proposal was issued to compete the lab contract, without guaranteeing that their pension assets would be retained by UCRP. That raised the possibility that they would be removed from the highly effective UCRP fund and transferred to a smaller and unproven new pension program to be established by a new, stand-alone, limited liability company.
Efforts by the Los Alamos Committee on LANL Excellence, including a forum hosted by Joe Ladish and a panel of community leaders, in June 2005, elicited additional assurances on behalf of retirees from Tyler Przybylek, the chair of the Source Evaluation Board that evaluated proposals for managing the laboratory contract. Language about compensation in the request for proposal was changed from "comparable" to "substantially equivalent."
But then full alarms went off in early January 2006, when the UC regents did not entirely reject a plan to separate out the assets of the LANL retirees. Nothing had been settled with DOE by the time the contract was transferred to LANS on June 1, 2006. Concerns were compounded for some retirees by a lack of communication from UC that relegated them to a second-class status and shut them out of the negotiations.
A measure of assurance was regained on the eve of the contract transfer by Judy Ackerhalt, UC's executive director of human resources and benefits from the Office of the President. In a public meeting at Duane Smith Auditorium, she reaffirmed a commitment made by President Robert C. Dynes that employees would receive the defined benefits they had earned and had been promised.
"The University of California remains committed to honoring your pensions and benefits," she said at the time. "You are UC retirees and you will always be UC retirees."
Mansfield, whose retiree group has been most prominent in protecting retiree interests, attributed the outcome to political intervention.
"I got our congressional delegation really coming down hard on UC and DOE, saying do not separate these people out into a separate plan of some sort," he said.
The UC audit found that as of May 31, 2006, the last day of the UC contract with DOE/NNSA, the total market value of UCRP assets accrued for LANL-related members was $4.449 billion. The figure was calculated by the regents' actuary, the Segal Company and accepted by DOE/NNSA.
UC also said that DOE/NNSA has agreed to 100-percent funding of what they now call the "Retained LANL segment" within the overall UCRP.
DOE/NNSA will maintain that segment at 100 percent, if necessary, with additional payments over a seven-year period, the UC fact sheet stated.
On the Internet: http://atyourservice.ucop.edu/news/retirement/ucrp_asset_transfer.html
But how about the ~6,600 who requested their pension assets be transferred into TCP1?
LANS will receive $1.28B from UCRP for these employees.
UCRP's job was NOT to transfer the right amount to LANS, but rather to RETAIN the amount they needed for the existing retirees and inactives. The $1.28B represents the excess on their books to LANS.
By UCRP's own calculations (found deep in the news release appendices), they reckoned that those 6,600 will actually need $1.4B in LANS.
They point out in the footnotes that LANS will have its own actuary with its own calculations, and that therefore the LANS amount may differ.
Bottom line, by UCRP calculations, the LANS pension plan is already $120M *underfunded* as of June 1, 2006. So the open question is how aggressively will LANS tackle the new TCP1 pension fund and get it properly funded, on top of all of the other budgetary woes?
Or will a simple change in actuarial assumptions be good enough to cover the shortfall?
Or are they counting on a RIF to reduce the future burden?
The days of the a LANL worker who stays around for 25 or 30 years and then retires is now over. LANS will bring in new folks and then get rid of them long before they ever reach that many years of service. It's the way most of corporate America works these days. Hire 'em, and then fire 'em. That's the new motto or a Corporate America. Only the pigs at the top get to prosper.
Given this scenario, LANS probably feels that a little over $1 billion for the current 6,600 TCP1 folks will be plenty of cash. Heck, the LANS corporate board (with guys like Gerald Parsky) might even try putting some of the pension money with their friends in the private hedge fund world. With only 6,600 scared sheep to worry about, it will be much easier to use the TCP1 funds as their private monopoly money.
The employees that transferred into the substantially equivalent TCP1 at LANS start off underfunded, but don't worry as this pension plan is backed up the PBGC and everyone is fully protected. I am sure that everyone in TCP1 feels warm and fuzzy about this.
I am willing that Pat sniffed this one out as it was blowing in on the wind, and checked the appropriate box.
Look at the bright side, the NNSA order to give TCP1 members a one time opportunity to lump out into a 401k before the plan goes insolvent is still floating out there somewhere.
But more interesting is the Memo and Attachments:
From Attachment 1, UCRP pension analysis by the Segal Group, Exhibit A, we see that 6,532 active members in TCP1 have an average age of 43.6 years, with 9.2 years of service, and an average salary of $89,450, for a total payroll of $584M.
Recall that TCP1 is a closed pension, no new members allowed, so calculations are actually much simpler. Let's do a "back of the envelope" caculation, staying in *today's* dollars.
It takes only 5 years to vest, so all of these people, on average, are already vested.
Just *six* years from June 1, 2006, those 6500 employees can start retiring at age 50. At age 50, with 15 years of service (i.e. all 6500 stay employed), these 6500 employees will be eligible for 15 * 1.1% = 16.5% of their salary. That is a $96M/year liability, in TODAY's dollars. The pension plan has just roughly 13 years of that amount NOW.
Folks, that liability is just six years from now.
*Sixteen* years from now, this same group will have an average age of 60, eligible for 25 years * 2.5% = 62.5% of their salary. In TODAY's dollars, that is $365M/year payout in pensions. That is 3.5 years of TODAY's pension total of $1.3B.
So, obviously, the actual needs of TCP1 have to account for the rate of growth in the account and the contributions made to the account in the next six to sixteen years. But salaries also grow, so the real rate of return has to first beat inflation.
Roughly, a 7.2% rate of return OVER inflation will double the pension amount in ten years (rule of 72).
Where have you seen that rate of return lately?
This TCP1 group will start retiring on average over the next 6 to 16 years. So, if TCP1 pension managers are lucky, they can double the 1.28B in the next ten years, relative to inflation.
But my "back of the envelope" calculations are unable to account for how TCP1 will be able to sustain upcoming payouts of something between $96M and $365M per year, starting in the next 6 to 16 years, for participants that will live on average into their 80s.
Therefore, we need a formal pension accounting, *fast*, of just how badly we are underfunded.
Explain to us why we should not worry. Will we make it up by employer/employee contributions? Are we counting on 'attrition' and RIFs to reduce the liability? Or will we need to freeze TCP1 ASAP to limit the damage, and force these TCP1 participants into TCP2.
Inquiring minds need to know.
But regarding the statements that experts have vetted the transfer to LANS, I am relying on exactly those experts whose analysis is presented in these documents. The intent of the analysis was clearly spelled out that it was solely to ensure that UCRP was properly funded. They called their technical analysis formula "A minus B" (I kid you not). These experts have absolutely confirmed that UCRP is in good shape for the retirees and inactives.
They state that TCP1 is simply getting the remains of the funds that were in the UCRP, "A minus B". Their summary analysis is that TCP1 is already underfunded.
Indeed, these same documents demonstrate that UCRP's picture actually improves slightly by removing 6600 active employees and only $1.28B.
So at some point, soon I hope, DOE/LANS will have to formally address the true nature of the TCP1 underfunding.
With over a billion in assets and a population of aging (and mostly still active) employees that would make an actuary giggle with glee, TCP1 is off to a good start. The math provided in the less than optimistic example is not actuarially sound as a function of pension calculation. The whole concept of pension funding is that a chunk of your population is dying off even as another chunk is commencing benefits. It's really not quite as simple as it's made out to determine pension liability. Also, a point not yet mentioned, funding TCP1 is an allowable cost under the operating contract. So, DOE is on the hook to fund the plan assets it's ever short funded. I am hardly a trusting yes man type labbie, but I for one agree with one of the previous posters that the erosion of science is a bigger concern than any theoretical funding issue with my pension. I'm worried about this LAB more than I'm worried about my retirement or benefits. Maybe the reason that most of the 6k enrolled in TCP1 aren't as worried is that they're more informed and a little less paranoid?
1) If you read ucop.edu they discuss UC starting to contribute at 2% starting this year and by 20something (2010?) the contribution will be up to 16%. LANS will follow suit.
2) To avoid large payouts of TCP 1 shortly they will have to change the age factors. You will have to work until 62 or later to get to the .2 factor and above.
3) LANS will find a way to get you out before 62 to keep your retirement payout as low as possible
4) You don't know what the actuaries are really doing. Corporate america raided pensions to make up for stockholder shortfalls with the idea of paying it all back when markets rebounded. Who says with budget shortfalls LANS isn't doing the same thing? Pay now and we'll get it all back in before anyone knows.
Given the lack of preparation for the fee and the gross receipts tax, why should we expect any preparation for the pension underfunding? Both the fee and the GRT are allowable expenses in the budget, but there was no extra budget provided.
It seems remarkable that some of the posters above believe that the pension is well-funded in the transfer from UC to LANS. The agreement signed this Monday clearly states in the footnotes that the actuarial analysis and transfer were solely for the benefit of UCRP, not LANS. What document are they relying on?
Indeed, the actuarial analysis provided by UC experts clearly states TCP1 is underfunded, so when will LANS address the problem, and where will that money come from?
Recent history suggests this management crowd will wait to the last possible moment, then proclaim shock at the budget "surprise". Then fringe will sky-rocket overnight, once again wreaking havoc with my budgets, and further eroding my ability to attract new money.