U. California Moving Away From DB | Chief Investment Officer

The University of California’s (UC) Board of Regents has approved a new retirement plan that would shift the organization’s $95.7 billion fund away from the defined benefit (DB) model.

The new program—set to affect employees hired on or after July 1, 2016—offers two choices: a combined defined contribution (DC) and DB plan or a straight 401(k).

UC President Janet Napolitano, who presented the plan at the board’s finance meeting last week, said it would save the system $99 million annually on average over the next 15 years—as well as speeding up funding for pension liabilities.

“These changes are reflective of the hard choices we need to make to ensure the university’s long-term sustainability and to sustain its academic excellence,” she said.

Want the latest institutional investment industry news and insights? Sign up for CIO newsletters. 

The UC committed to reforming its pension plan as part of a 2015 budget agreement with the state governor, which granted the university an additional $1 billion, including $436 million over three years to pay off unfunded pension liabilities.

In exchange, the Regents agreed to cap salary eligiblity for defined pension benefits at $117,020, with a 401(k) supplement for employee pay above that amount.

Employees will also have the choice to opt out of the DB plan altogether in favor of a pure DC plan. These participants will receive a higher employer contribution—8%—while the hybrid plan matches 3% to 5%.

Currently, the defined benefit pension is the largest of the university’s five capital pools, with its $53.6 billion making up more than half of total assets.

The defined contribution plan totaled $19.6 billion as of December 31, 2015.

Large US corporate pension plans have largely broken out of herd mentality over the last 10 years, according Russell Investments’ Chief Research Strategist Bob Collie.

Investment strategies among Russell’s $20 Billion Club—the 20 corporations with the largest pension liabilities—have significantly diversified since 2006, Collie wrote in his latest blog post.

“These plans’ investment decisions are clearly being driven by factors other than a desire to track to broader peer group behavior, and that has to be a good thing,” he continued.

From a study of annual regulatory filings, he found wide-ranging approaches to hedge funds, private equity, real estate, and liability hedging.

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

For example, UPS invested more than 12% of its total pension assets in hedge funds, whereas five members of the $20 Billion Club skipped the vehicles entirely.

Verizon had a 19% private equity allocation, compared to Federal Express’ 1%.

Collie also found Dow, Northrop Grumman, and Verizon all had around 10% of their pension assets in real estate, despite ExxonMobile having none.

Furthermore, Ford’s US plans invested 77% in fixed income and 7% in listed equities, pointing to a liability-hedging strategy. Johnson & Johnson’s pension portfolio, however, sought returns with 79% in stocks, and just 21% in fixed income.

But some herding behavior still exists, Collie added—and “frequently with good reason.”

After AT&T shifted to a full yield curve for determining discount rates and service and interest costs in 2015, at least eight other members of the $20 Billion Club followed suit and made the change.

“So the herd is alive and well in some regards,” Collie concluded, “but when it comes to investment strategy, the pension-plan herd has broken up.”