Wednesday, December 8, 2021

Questions hover over University of Puerto Rico pension

By on October 5, 2018

Editor’s note: The following originally appeared in the Oct. 4-10, 2018, issue of Caribbean Business.

While the Financial Oversight & Management Board (FOMB) is dead set on transitioning all public pension systems to a defined contribution scheme, the board of the University of Puerto Rico Retirement Trust remains a strong advocate for marinating the current defined benefits scheme.

For the fiscal control board’s executive director, Natalie Jaresko, a transition to a defined contribution system will bring pensioners more security and credibility because the government will make the proper allocations, as well as give people the power to decide how to invest in their retirement fund.

On the other side of the dispute, the chairman of the UPR Retirement Trust, Eduardo Berríos Torres, stated a defined benefit scheme is the only way to give pensioners security because it is the only system that promises retirement payments until the death of the person. In terms of the pension system’s sustainability, Berríos Torres alluded to the actuary reports to argue that a transition to a defined contribution plan will also increase UPR’s economic burden.

The main difference between these systems is who carries the risk. In a defined contribution plan, as the name indicates, the university would establish a predetermined figure that would be set aside from the institution and employees to be put in a 401(k) or another retirement system in which to be invested. In this case, since the university would contribute a fixed amount to the pension system, the risk involving the fund’s investment would fall on the side of the future retiree.

In a defined benefits plan, it is the benefit that is predetermined. In the collective fund, the institution bears the risk of any economic shortcomings and the pensioners are guaranteed for life.

Fixing what’s not broken or preventing a debacle

The UPR professors and non-teaching staff are part of the defined benefits Retirement Trust, which falls under the purview of the UPR governing board, but it is a separate entity from the academic institution.

For Berríos Torres, it is about not trying to change what is not broken. In addition to the importance UPR pension system members give to a guaranteed pension for life, which cannot be guaranteed under a defined contribution plan, Berríos Torres’ main point against transitioning from the defined benefits plan is related to the UPR Retirement Trust’s soundness compared to other public pension systems.

The UPR Retirement Trust has 10,200 active members, of which 75 percent are eligible for retirement, and 8,800 pensioners, which translate to an annual payment of $200 million. However, the Retirement Board chairman explained that this payment does not come from the university; it comes from the trust itself. The university just makes the regular employer contribution and payment for the amortization plan.

In 2015, the UPR Governing Board approved a 40-year amortization plan to address the $1.4 billion debt the UPR has with the Retirement Trust. Prior to the amortization plan and in the first year after it was approved, the academic institution was able to disperse more than the required projected payment. However, in 2016, the UPR’s payment to the retirement trust fell short by $6.3 million and the 2017 payment projection falls short by $12 million.

Despite the university falling behind on debt payments, Berríos Torres stated: “Our [retirement system,] for the past five years, has had an increasing funding ratio. Right now, in the latest actuary report that we approved, because it is the Retirement Board that approves the actuary reports, from June 30, 2017, the UPR funding ratio has been 48.8 percent.”

By the time the UPR finishes paying its actuary debt to the pension system, this retirement fund is projected to achieve a 100 percent funding ratio. In the meantime, the Retirement Trust is also financed by the employee contribution, which in the case of the newest members is 12 percent, four points higher than the cost per pension, and the rest of the employees also give a 1 percent contribution to the fund, which is not destined to their personal pensions. The retirement system is also funded by the investment from a portfolio that has not seen a net loss since at least 2013.

Another problem Berríos Torres highlighted is the hiring freeze, which has reduced the number of employees in the institutions by 1,000.

“The Retirement Board, thinking about the good of the institution and the Retirement System, has proposed amending that [hiring freeze] policy because it is detrimental to both parties. We propose that for every two people who retire that one is hired,” Berríos Torres said.

Differing views

“The first step is to move everyone to a defined contribution plan,” said the fiscal control board’s executive director about the Retirement Board’s position. Although “it will not be identical policy applied to all [public retirement systems] regardless of the funding levels; it will be adjusted for the funding level,” Jaresko explained, after recognizing the UPR retirement system has a higher funding ratio than other public pension systems, which have become insolvent.

Nonetheless, Jaresko was quick to point out that the fiscal control board is not in agreement with the assessment of the actuary report for the Retirement Trust, which puts the funding ratio at 48.8 percent.

“There [with the actuary report] we don’t have an agreement on how much. What we agreed to is that we would start to cooperate, and they will provide us more actuarial data. But the evaluation that results in a 48 percent level of funding uses a required return rate that is much higher than we would have expected. It is 7.75 percent. Earning 7.75 percent on a going-forward basis is highly unlikely given the rates of return right now on risk-free securities treasurys are so low,” Jaresko said.

“I know the retirement system was able to accomplish that type of return in the past,” she added, “but back then, U.S. securities treasurys were trading and were providing a much higher return than they do today.”

In the case of the defined benefits schemes, Jaresko argued that the main concern is a lack of certainty because governments, regardless of party or political affiliation, have not met their responsibilities for the pension system.

“We have a singular goal when it comes to the Puerto Rican retirement systems across the board, including the UPR, which is to ensure they are properly funded and positioned to provide the pensions the people, the retirees, need and have been promised. We are, across all retirement systems, moving from defined benefits to a defined contribution system, and that is not unique for Puerto Rico. That is what’s happening wherever and whenever it can happen in public systems,” Jaresko argued.

Indeed, there have been increased pressures on pension systems, including in the academic arena, to transition from defined benefits plans to defined contribution schemes in the United States, United Kingdom and other countries. For example, University of Waterloo, University of Chicago and Berklee College of Music have frozen their defined benefits systems.

This transition to a prevalence of defined contribution systems has also received pushback. Earlier this year, the UK’s University & College Union went on strike to defend their defined benefits plan. The strike was lifted only after the universities proposed to establish an expert panel to evaluate both systems.

On Sept. 26, the Financial Times, a finance-focused paper based in London, reported the expert panel concluded the defined benefits plan was “less expensive” for workers “than the privately-run fund manager.”

This assessment coincides with the conclusion in the actuary report commissioned by the Retirement Board from Cavanaugh & McDonald Consulting. In the report, actuaries analyze a freeze of the current system with all employees transitioning to the defined contribution system, and a scenario in which the defined benefits system is frozen with current members staying in the system and new employees going directly to a defined contribution scheme. In both cases, the pension system would become insolvent in less than 30 years.

However, Jaresko argued that the scenarios considered in the actuary report lack consideration of other factors such as a reduction of pension benefits.

The falling bridge

Aside from the back and forth between the fiscal control board and the Retirement Trust Board, the latter has also experienced a deteriorating relationship with the UPR Governing Board.

The Retirement Board’s grievances echo those by governance bodies within the institution, such as the University Board, which comprises representatives from all UPR campuses. For both entities, the complaint is that the Governing Board has shut out existing institutional structures from the process of delineating a fiscal plan and establishing a budget.

For the most recent budget process, the complaint from various University Board members—contrary to what was established in Act 1 of 1966 and in university bylaws—was that the University Board’s budget and planning committee was not consulted in the process of preparing the budget that would be sent to the FOMB for certification. Instead, the University Board saw the document a few days before the deadline.

With a similar complaint, the Retirement Board criticized the Governing Board decision to exclude Retirement Trust representatives from elaborating on the pension system proposal contained in the UPR fiscal plan. This complaint has intensified since the board approved the creation of the Office for Institutional Transformation, which will oversee implementation of the measures in the fiscal plan.

Berríos Torres explained that since August 2017, he had not been summoned to any meetings held by the Retirement Committee of the UPR Governing Board, which is presided by Zoraida Buxó, the vice chairwoman of the governing board.

However, Berríos Torres was invited to the latest meeting of the retirement committee but decided not to go. The professor explained in a letter to the governing board that he would not be attending the meeting because he believed the governing board decision to hire the accounting and consulting firm of BDO Puerto Rico—to evaluate the Retirement Trust’s finances and become the link between the governing board and the retirement system—was a violation of the trust’s regulations and bylaws.

“The action of the Retirement Committee of the Governing Board is ultra-vires [beyond one’s legal power or authority] since it deposits in third parties the fiduciary responsibility ascribed to the Governing Board and the Retirement Board in the Trust deeds and in Puerto Rico Trust Fund Law,” the letter read.

The Retirement Trust Board chairman was referring to a contract that Walter Alomar, as chairman of the UPR Governing Board, signed on Sept. 9, 2018, with BDO Puerto Rico, in which the consulting firm is tasked with “advising about the best alternatives for transforming the pension system of the University of Puerto Rico to implement the university’s fiscal plan,” the contract said.

Since the creation of the Retirement Trust, the task of advising the university’s governing entity has been the responsibility of the Retirement Trust Board.

The contract, which has a 16-week deadline to produce a final report, stipulates all “written materials, documents, data and other information produced from or related to the tasks carried out by the ‘second party’ [BDO Puerto Rico] in compliance with the provisions of this contract, will be confidential and cannot be disclosed without authorization of the [Governing] Board.”

For members of the retirement system and other university organizations, such as the Asociación Puertorriqueña de Profesores Universitarios, this $300,000 contract shows a lack of transparency and interest in the democratic process from the governing board. When BDO came unannounced to the Retirement Trust offices, Berríos Torres did not consent to the consulting firm’s request to access the system’s financial information.

Nevertheless, the Governing Board’s Buxó stood by the decision to hire BDO. In a letter to Berríos Torres, the governing board’s Retirement Committee vice chairwoman argued that hiring the consulting firm is within the board’s prerogative and is part of the changes the Office for Institutional Transformation will be implementing.

Furthermore, Buxó disparaged Berríos in a press release, saying it is “irresponsible for the chair of the Retirement Board, Dr. Eduardo Berríos Torres, to obstruct the process of obtaining information and analysis being done by the governing entity of the institution about the Retirement System of the UPR.” Requests for an interview with the Governing Board were not returned.

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