By Paul Brooks, Spectroscopist, Department of Integrative Biology, UPTE Bargaining Representative

Shared governance of the University of California Retirement Plan must be established before faculty and staff should be expected to re-start contributions. 11th November 2008.

The re-start of pension contributions is expected to be necessary in the next year. This might not have been necessary had the management of the pension fund remained with the office of the Treasury in 2000. Since then the UC pension fund has gone from performing in the top quartile to the bottom quartile, has not been run to best actuarial standards, not referenced adequately to similar benchmarks, and management fees seem to have been excessive. Now that faculty and staff are being asked to start contributions to the pension, we believe that the oversight of the pension plan must be changed to qualified trustees. Therefore we propose that the pension fund should have elected representatives to a board of trustees, similar to that used by Calpers, before contributions are re-started. In addition the university should take a leadership role in creating a qualification program for pension trustees and requiring UC pension trustees to be qualified.

The actions of the last eight years show that the regents have not adequately fulfilled their fiduciary responsibility to the UC pension fund:

The fund has gone from performing in the top quartile to the bottom quartile since the management was changed in 2000. 25, 26, 30 There are no performance reports for external managers, quarterly reports comparing UCRP investment performance to peer groups, annual reports of fees to internal and external managers and reports on commission paid to transactions.40

Not used best actuarial oversight: Actuarial models used to project the liability of a pension fund have on the order of 25 input variables such as life expectancy, average age of retirement, number of retirees who cash out, fund performance, etc. By making small changes in these variables the potential liability of a pension fund can be dramatically adjusted over a 20-year projection. This is why best actuarial practices demand a stochastic evaluation, preferably annually, and at least every three years to determine how correct the assumptions in the model are. Stochastic studies were done in 2000, 2003 but not since then. This is reason enough to demand oversight of the pension fund by management and elected trained faculty and staff to form an accountable board of trustees. One possible reason for no 2006 stochastic study is that in 2005 the Governor decreed that by July 2007 all new state employees would be on a 401k pension plan and existing plans would closed to new hires. Were the inputs for the UC pension fund then adjusted to make it look as though the fund were not performing well in order to make new hires willing to change to a 401k plan? Why does the UCRP web site only have one curve showing a downward trend in funding instead of a range35? One mission of higher education is to teach the analysis of data. This includes the propagation of error and how sensitivity analysis in input variables is necessary to understand models that project into the future. This good management should be required for all pension data.

The Regents have engaged in unnecessarily secretive and poor decision making: In the late 1990’s the regents conducted closed meetings chaired by Regent Parsky. In these meetings Patricia Small’s management of the pension plan was criticized without mentioning that the fund was the one of the best performing of that size.22 Also, risk assessment of the portfolio was not evaluated at the time.21 The content of these meetings was unknown until ruled illegal by the California Supreme Court in 2003.20 In 2000 Patricia Small was abruptly told it was time for her to retire with a generous severance package she would lose it if she “disparaged” the regents, or she would be fired.25 The regents then assigned management of the fund to the same firm, Wilshire Associates, which had critiqued the pension and which had donated money to the 2000 California George Bush election campaign, also chaired by Regent Parsky. These were clear conflicts of interest. This was in spite of the fact that Wilshire Associates had made numerous errors in their publicly released information. 1,2,3,4,5,6,7,8,9,11,13,14,15,17, 21.

In 2003 Wilshire Associates was caught short trading on the New York Stock exchange. Wilshire Associates both invested money for investors, and offered a service to find investment money for businesses; the firm insisted these funds were kept separate but they were managed by the same person, a clear conflict of interest. At best, these actions were poor judgment, and, at worst, a misuse of power to hand management fees to favored firms. These actions would not have occurred if the decision had been conducted in public with informed, trained trustees to oversee the fund. 23

Excessive management fees: Pension management fees are not readily available, as should be required with good pension oversight. It appears that management fees are 0.36% of the fund, a very high figure34. Assuming that management fees prior to 2000 were on the order of 0.1% management fees since then may have cost the pension fund on the order of $1 billion36.

No election of pension advising board: The pension plan is supposed to have an elected advisory board, but it had not been elected in five years, when it was required. An election was finally held by sending out one e-mail, with no follow up e-mail for those who missed it, at a time when reminders to take the ethics test were being sent out weekly. Candidates chosen by the University were elected. 31

Trustees should be elected using a method similar to Calpers.32

Trustees must be qualified in order to serve: The proposal for joint governance of the pension fund should not be confused with management of the pension fund. Management of the pension fund should be performed by professional investors who are accountable to a board of trustees from the regents, state government, retirees, management and staff .39 The Trustees must be required to disclose any conflicts of interest while fulfilling their duty and must be required to have training in best actuarial practices in order to serve, as is now required by law in Britain.33

The University of California should take a lead in establishing this training requirement that will then become a model for pension plans throughout the United States.

Ballot initiative: A ballot initiative for a joint governance.37

Constitutional amendment: Assembly member Portantino has introduced ACA 5 for shared governance of the UC pension. 38

Notes: We are indebted to Dr. Charles Schwartz for much of the data criticizing the pension plan management. We welcome any corrections to the facts cited in these references. Any reader who attacks the character of the reference writer rather than the facts cited is reminded that they are committing an Ad Hominnem fallacy (described at http://www.nizkor.org/features/fallacies/ad-hominem.html).

1) Mentions that the problem of no propagation of error in the Wilshire report, introduction, Wilshire basic calculations not correct. No March meeting announcing changes as was claimed.
http://socrates.berkeley.edu/~schwrtz/WHPF1.html

2) Ask for more info, lack of sensitivity analysis, improved rate of return based on a non-significant 0.2% improvement in fund performance, questions risk assessment, whole modeling not up to academic standard. Wilshire review was very poor, mathematics incorrect, logic and objectivity.
http://socrates.berkeley.edu/~schwrtz/WHPF2.html

3) Ask for minutes of meetings with Wilshire, shows past returns of UCRP better than PERS, risk assessment less for UCRP. Shows the original investment strategy had a higher probability of meeting the pensions plan needs.
http://socrates.berkeley.edu/~schwrtz/WHPF3.html

4) The diversification of equities, such as 7% to be in non-US equities recommended by Wilshire associates was already about the amount actually held. An act of incompetence or fraud? Same for mid-cap equity. The UC team consistently beat the index. The treasurer was no longer an independent officer of the Regents, but a subordinate of the President. It appears Wilshire’s review was a hatchet job to demolish the UC Treasurer’s office.
http://socrates.berkeley.edu/~schwrtz/WHPF4.html

5) Regents showed a bias towards private management of fund that may have caused them to overlook the problems with the Wilshire report as a basis of philosophy. The "UC Treasurer's Response to the March 16, 2000 Wilshire Investment Strategy Study" States “Many large institutions are struggling to rebuild their programs after outsourcing and it is those institutions like Stanford, Harvard, MIT and The University of California that have maintained the integrity of their program over time that are generating the top tier returns.” At least three regents, Parsky, Leach and Moores may have conflicts of interest that may not have been explained in closed session.
http://socrates.berkeley.edu/~schwrtz/WHPF5.html

6) Schwartz states in his critique that Wilshire has:
• Errors in basic arithmetic;
• Misleading presentation of statistical projections;
• Failure to assess the reliability of their numerical results and consequent claims;
• Omission of an objective evaluation of previous UC investment performance;
• Misrepresentation of their new recommendations vis-a-vis previous UC investment practices.

Has not been rebutted, and stands, Jan 8 and 17 at Regents meeting 2001. Rebuttal from Wilshire shown as totally inadequate.

Towers Perrin and Wilshire showed a difference of 100% in the assets/liability ratio of the pension fund by 2020! Tower and Perrin 204% of assets by 2019, Wilshire 118% by 2020.
http://socrates.berkeley.edu/~schwrtz/WHPF6.html

7) Showed that Wilshire recommendations would results in lower returns when risk assessment is taken into effect. Why was this not in a report from them and made public?
http://socrates.berkeley.edu/~schwrtz/WHPF7.html

8) Regent Judith L. Hopkinson, Chair of the Regents' Committee on Investments, issued a public letter detailing what changes in investment policies the Board of Regents had adopted. Regent Hopkinson was wrong, and there was no or very little change in the management strategy and risk assessment of the stocks. Stock picking was done by more than 2 people, but 14-16 in the UC Treasurer’s office. Only four firms were invited to review the UC retirement fund, and because of the short time table only two submitted bids. Regent Hopkinson gave disinformation intended to create a false impression about the changes in management of the pension fund. There was no evaluation of the risk-adjusted returns for the bond index. UC was doing very well.

http://socrates.berkeley.edu/~schwrtz/WHPF8.html

9) Wilshire assumed no lump sum distributions and higher age participants than Towers and Perrin, and so came out with completely different numbers. This was not best actuarial practice.
http://socrates.berkeley.edu/~schwrtz/WHPF9.html

10) University of Texas, Creation of UTIMCO. Hicks funds takeover deals using UT retirement funds. Many went to Republican donors and where Hicks had financial interest, using closed-door, off campus meetings. UC’s new treasurer Russ worked for them.
http://socrates.berkeley.edu/~schwrtz/WHPF10.html

11) Associate Vice President Judith Boyette tries to explain the Wilshire associates and Towers and Perrin differences in forecasts but cannot. It looks like incompetence in depth.
http://socrates.berkeley.edu/~schwrtz/WHPF12.html

12) No response to questions on guidelines for closed sessions. Closed sessions seem excessive.
http://socrates.berkeley.edu/~schwrtz/WHPF12.html

13) Under Russ presentation, risk assessment disappears. Claims that UC under-performed by 10% when the actual figure is 4%. It would appear that the regents are being deceived. Blum is new regent and founder of investment firm.
http://socrates.berkeley.edu/~schwrtz/WHPF13.html

14) Russ starts comparing to the S&P 500 instead of the CRA numbers then the returns are better for UC’s managing of the fund. Russ’s S&P 500 numbers are wrong! The UC managed investment beat the S&P 500 index by 0.9% over the most recent 10 year period to Dec. 2002 (Russ apparently successfully answered this in part 15). UC 9 member staff of equity investment professionals have been fired and external managers are being found. Recommend that some outside experts be brought in to check Schwartz’s figures and look into this.
http://socrates.berkeley.edu/~schwrtz/WHPF14.html

15) Russ answers criticisms. Schwartz summaries his questions. Russ explicitly states he did not consider risk assessment. Russ would not send data to Schwartz to calculate the risk-adjusted returns. Still strong evidence that regents have been misguided.
http://socrates.berkeley.edu/~schwrtz/WHPF15.html

16) No documents for coming on analysis on why external managers would be better than in-house UC managers. Professional managers do average or lower, so their cost is critical to the analysis. Calpers external expense ratio increased from 0.09% to 0.77% from 1997 –t 2002. UC management and administrative costs were only 0.04%. No wonder investment professionals recommend external managers. Calpers found that 4 out of 5 managers had not met Calpers return objectives, and they are advised by Wilshire associates-- this is a problem. The investment advisory committee is made up of investment professionals from private investment firms who suggested this change.
http://socrates.berkeley.edu/~schwrtz/WHPF16.html

17) New documents show that risk-adjusted returns were better than average, this not shown to regents by Russ. Internal Bond managers are still performing well above average 20-30% better, even with risk adjustment. Russ biased, saying bond fund was doing slightly better when stocks at 1-2% lower than average were doing substantially worse. Russ’s own data show that the UC management were over performing the CRA benchmark for private managers. How will he find better managers?

http://socrates.berkeley.edu/~schwrtz/WHPF17.html

18)– Lawsuit to get closed meeting documents started. There were no consultations with outside professionals as claimed by Russ ("After extensive consultation with outside investment professionals, as well as the UC Regents'). Nesbit from Wilshire associates did not use the same time data when comparing UC pension performance to other pensions, a gross error for a professional. The regents may soon have to resuming payments into the pension fund.

Blum, a major player in real estate investment, was anxious to have part of the fund in real estate -- Calpers pays 8% cost on their real estate investments. Russ did not want to discuss risk assessment, and has never contradicted Schwartz’s claims.
http://socrates.berkeley.edu/~schwrtz/WHPF18.html

19) Some questions as to how the outside management will be selected and their fees, kickbacks on using a particular broker, conflict of interest between who is chosen and UC staff, etc. Wilshire Associates is found to have skimmed off large amounts of money from funds, via “fast or late trading”. Why weren’t these concerns discussed in public? The regents need to set guidelines of what they expect.

http://socrates.berkeley.edu/~schwrtz/WHPF19.html

20) Lawsuit won, UC to make documents public. Wilshire’s Nesbitt leaves Wilshire and was in charge of both the investment and the consulting side of Wilshire. Wilshire had conflict of interest on selection of outside managers.

http://socrates.berkeley.edu/~schwrtz/WHPF20.html

21) Documents from closed session arrive. S&P as benchmark was fabricated in 2000, prior to that it was other SEI funds or similar endowment funds. Risk assessment was less for UC’s funds, so was distorted and ignored by Wilshire. They probably kept risk assessment data quiet. They change benchmarks (picked high performers) to try to show that the UCRP not doing as well as expected. Wilshire committed fraud. Regent Moores tried to use hindsight to say fund was 2.5 billion short of what it would have been if invested with other funds. Wilshire did not use proper statistics showing error propagation. The regents were simply not responsible in their Fiduciary responsibilities.

http://socrates.berkeley.edu/~schwrtz/WHPF21.html

22) UCRP performance was the best of similar funds 1990-2003. The regents never appeared to have considered this in outsourcing some of the investment management.

http://socrates.berkeley.edu/~schwrtz/WHPF22.html

23) Wilshire is out as consultant. Financial services sales are a huge increase in where the jobs are. Most fund managers are anxious to move on to another high paying job in the industry and to not questions other industry practices. Plenty of funds are still happy to work with the university and release IRR’s or internal rates of return.

http://socrates.berkeley.edu/~schwrtz/WHPF23.html

24) Conflict of interest policy may not be adequate as regents can suggest a firm they have interests in, but not require it.

http://socrates.berkeley.edu/~schwrtz/WHPF24.html

25) How to measure investment performance. Get a letter from the Treasurer’s Office stating that “the Treasurer’s Office has moved away from peer group comparisons and has discontinued its subscription to the [TUCS] … and has no plans to subscribe to any service providing peer group comparison information in the future.”

http://socrates.berkeley.edu/~schwrtz/WHPF25.html

26) The UC pension fund has moved from the top quartile to the bottom quartile in, before, and after 2000.

http://socrates.berkeley.edu/%7Eschwrtz/UCPeers.html

27) East Bay Express article Parsky’s Party: http://www.eastbayexpress.com/gyrobase/parsky_s_party/Content?oid=426427&page=1

28) Rebuttal to East Bay Express article: (no significant data sited).

http://www.upte-cwa.org/UCLA/AllMobbedUp/ed_ltr.pdf

http://www.upte-cwa.org/UCLA/AllMobbedUp/ea_factsheet.pdf

29) Next East Bay Article, and notes on Rebuttal and Yee’s proposal:

http://www.eastbayexpress.com/news/pension_woes_dog_uc_regents/Content?oid=432863

30) Patricia Small’s letter rebutting the claim that the UC pension plan would be worth $2.7 billion dollars less today if it had not changed management in 2000. Points out that the pension fund performed in the bottom quartile for the five years to 2007.

http://www.eastbayexpress.com/news/letters_for_the_week_of_june_20__2007/Content?oid=444014

31) Letter from Yee on sham election for UCRS advisory board

http://www.eastbayexpress.com/news/letters_for_the_week_of_july_18_24__2007/Content?oid=465456

32) Reference that shows that Calpers has elected trustees. http://www.calpers.ca.gov/eip-docs/about/facts/general.pdf

33) British law requiring that pension trustees must be trained to serve.

http://www.thepensionsregulator.gov.uk/trustees/trusteeKnowledge/index.aspx

34) Article on fees management fees for UCRP
http://socrates.berkeley.edu/~schwrtz/UCRPFees.html

35) Graph showing future of pension plan with no propagation of error.
http://www.universityofcalifornia.edu/news/ucrpfuture/welcome.html

36) Estimate cost of excessive management fees 2000-2008.
Assumes that pre-management fees were 0.1% of the fund, that fund is $48 billion, and that post 2000 management fees have been 0.36%. 0.36% minus 0.1% = 0.26%. Multiply 0.26% by $48 billion and 8 years equals about $1 billion. Any correction to these figures is welcome. The fact that they are not readily available shows incompetence in managing the pension fund.

37) Ballot initiative for shared governance.

http://www.californiaprogressreport.com/2008/09/fairness_for_uc.html

38) Details on constitutional amendment to for shared governance.

http://www.californiachronicle.com/articles/66116

39) From Assembly bill ACA 5.

http://info.sen.ca.gov/pub/07-08/bill/asm/ab_0001-0050/aca_5_bill_20080616_amended_asm_v98.html

“The board shall be composed of the
following:

(1) Three members appointed by the Regents of the University of
California.
(2) Three ex officio members:
(A) The Lieutenant Governor.
(B) The Speaker of the Assembly.
(C) The Superintendent of Public Instruction.
(3) One member who is a retiree who is elected by a plurality vote
of retirees of the retirement plan.
(4) Three members who are active faculty or staff participants in
the retirement plan who are elected by a plurality vote of all active
faculty and staff participants in the retirement plan.
(5) One member who is a member of the Academic Senate, University
of California, who is elected by a plurality vote of all members who
are eligible to vote for the Academic Senate, University of
California, and who are active participants in the retirement plan.
(6) One member who holds a nonacademic position and who is elected
by a plurality vote of all nonacademic members who are active
participants in the retirement plan.
(7) One member who is represented by collective bargaining who is
elected by a plurality vote of all active participants in the
retirement plan who are represented by collective bargaining.
(c) Meetings of the board of trustees shall be public, subject to
the same exceptions and notice requirements that by statute apply to
meetings of the Regents of the University of California.
(d) The provisions of Section 17 of Article XVI that apply to
retirement boards, except subdivision (f), apply to the board of
trustees.”

40) Dr. Schwartz’s observations on what disclosures are missing from the pension fund.

http://socrates.berkeley.edu/~schwrtz/FinU16.html part F.

F. What’s Missing – Disclosures re the Pension Fund

The University’s Pension Fund (UCRP), which is under the direct supervision of The Regents, has recently been a topic of keen interest to many employees; and it has also been a major area for my own investigations and writings. Here is a list of informational items which I have asked to be routinely published.
• Quarterly performance reports for each external investment manager engaged by UC;
• Quarterly reports that compare UCRP investment performance to that of relevant peer groups.
• Annual reports detailing expenses/fees paid out to external investment managers and consultants; also any internal expenses/fees paid out of the Fund.
• Annual report detailing commissions paid on securities transactions.

All of these data are routinely published by the state’s largest public pension funds, CalPERS and CalSTRS. In the spirit of transparency, UC should do so too.