Physician Retirement Benefits Survey

Transcription

1 Physician Retirement Benefits Survey University of California July 1 William M. Mercer, Incorporated Embarcadero Center San Francisco, CA 9111

2 Contents EXECUTIVE SUMMARY... 1 BACKGROUND... 8 PARTICIPATING ORGANIZATIONS... 9 GENERAL PARTICIPANT INFORMATION... 1 RETIREMENT PROGRAMS... 1 COMPETITIVENESS OF RETIREMENT BENEFITS... GLOSSARY... 8 APPENDIX... William M. Mercer, Incorporated i University of California

3 Executive Summary 1 institutions responded to this survey. 18 of 1 provide defined contribution (DC) plans as their primary retirement plan; UCRP is a defined benefit (DB) plan. 1 of 1 provide retirement benefits on more than X compensation; UCRP provides benefits only on X compensation. UCRP and the respondents plans were compared for different employee profiles. UCRP generally ranked lower for employees with shorter service and lower X compensation (e.g. $,). Also, for employees with lower X compensation, UCRP decreases in the rankings as the level of Y compensation increases. However, UCRP can be competitive for employees with longer service and lower base pay if their Y compensation is relatively moderate in relation to their X compensation (when Y is closer to % of X as opposed to 8% or more). Middle rankings were common for employees with higher X compensation (up to $1,), including those employees with shorter service. High rankings were found for longer service employees with X compensation of $, and over. The reasons for the high rankings include: as a DB plan, UCRP provides substantial benefits in comparison to DC plans both for older and longer service employees. UCRP also provides a very generous benefit formula in the universe of all retirement plans. Also, UCRP is not as constrained by the tax limits as are most of the respondents. 1. Introduction UC engaged William M. Mercer, Incorporated to conduct a survey of retirement benefits provided by leading medical schools and other leading large group practice organizations. The Physician Retirement Benefits Survey was undertaken in order to determine if UC s retirement benefits are competitive. Twenty-four leading schools and other organizations were invited to participate. Twenty-one responded. This high level of response occurred both because of the level of interest in this subject (this is the only survey of its type of which we are aware) and because the UC Medical School Deans encouraged other schools to participate.. Summary of Survey Results Type of Plan Provided UC provides only a defined benefit (DB) retirement plan with employer funding as its primary plan. William M. Mercer, Incorporated 1 University of California

4 of 1 respondents provide a DB plan. 19 of 1 respondents provide a defined contribution (DC) plan. 18 of 1 respondents provide a DC plan (or choice of DC plan) as the primary plan. Compensation Counted Under the Plan for Benefits Under Plans UC counts only X ( base ) compensation in UCRP. 8 of 1 respondents count only X compensation in their retirement plan. of 1 count both X and Y compensation in their retirement plan for determining retirement benefits. of 1 count X, Y and Z compensation. 1 of 1 counts other compensation, which is more than X compensation. Limits on Counting Compensation The tax laws limit the amount of compensation that can be counted for retirement purposes in a tax qualified plan. The amount that can be counted differs between institutions because of their legal status. Therefore, even though some institutions retirement plans state that they count more than X, as a legal matter no more than X can actually be taken into account. 1 UC can take into account up to $8, per year for pre /1/199 UCRP participants. UC can take into account up to $1, for other participants. For respondents with DB plans, of are limited to $1,/year. For respondents with DC plans, 18 of 19 are limited to $1,/year. UC has submitted to the IRS for approval a plan to take into account compensation in excess of the applicable limits. (This is called a make up plan.) of the DB respondents have a make up plan. of 19 DC respondents have such a plan. Limits on Paying Benefits Also, the tax laws limit the amount of retirement benefits provided under a tax qualified plan. The limits differ between types of plans. UCRP can pay an annual pension of up to $1, per year for employees who retire at the social security retirement age. This limit is reduced for younger ages. The same is true for the other DB plans Under a DC plan, the annual contribution to an individual s account is limited to $, or % of compensation, whichever is lower. UC also provides benefits over the limit applicable to defined benefit plans (in its restoration plan ). of DB respondents have a restoration plan. of 19 DC respondents have a restoration plan. 1 The new tax law increases these amounts in. The new tax law will not impact the limits for UCRP participants hired prior to July 1, 199. The new tax law increases these amounts in. William M. Mercer, Incorporated University of California

5 Benefit Formulas DB plan formulas vary widely, with accrual rates, normal retirement age, COLAs and other benefits varying. DC plan contribution rates also vary widely, but the employer contribution rate averages around 9 or 1% of compensation.. Competitive Comparison Methodology and Assumptions In comparing retirement plans, different results occur for different employees because: DB and DC retirement plan values build up at different rates over time. DB plan values generally increase as employees get older. However, as the formulas for calculating benefits among DB plans differ, so too may the value of their benefits. Different mixes of compensation (Y and Z as a percentage of X) affect the results Tax limits apply in some cases. These limit the amount of compensation considered in calculating benefits, the amount of contributions to retirement plans and/or benefits payable from retirement plans. Therefore, in comparing UCRP and other plans, five different employee profiles were used: Full career new hire (age : X = $,) Mid career new hire (age ; X = $1,) Current employee (age ; X = $1,; 1 years of service) Mid career new hire (age ; X = $,) Current employee (age ; X = $,; 1 years of service) Benefit values were also determined for different Y pay levels for each of the employee profiles: Y = %, 8%, and 1% of X pay. All retirement benefits were compared as lump sum values. This approach provides a single number to compare DB and DC. This approach also fits with UCRP, which offers a lump sum cash out for retirementeligible members. The DB lump sum is determined in accordance with stated retirement plan actuarial assumptions as of date of assumed termination. The DC lump sum is the account balance. Tax limits were applied. Calculations were done both under current law and for under the new tax law. Z pay was not included in these initial calculations because of the added complexity. Additional analyses that take into account Z pay will be completed. William M. Mercer, Incorporated University of California

6 Critical assumptions included: Pay increases based upon UCRP s actuarial assumptions for projected pay increases 8% investment earnings on defined contribution plans % employee contributions for both UC and the respondent plans William M. Mercer, Incorporated University of California

7 Comparative Results UCRP generally ranked lower for employees with shorter service and lower X compensation (e.g. $,). Also, for employees with lower X compensation, UCRP decreases in the rankings as the level of Y compensation increases. However, UCRP can be competitive for employees with longer service and lower base pay if their Y compensation is relatively moderate in relation to their X compensation (e.g. when Y is closer to % of X as opposed to 8% or more). Middle rankings were largely for employees with higher X compensation (up to $1,), including those employees with shorter service. Higher rankings were largely for longer service employees with X compensation of $, and over. Reasons for the results -- There are several reasons for the results, including: UCRP, as a defined benefit (DB) plan, provides substantial benefits in comparison to many respondents DC plans for older employees UCRP, as a DB plan, provides substantial benefits in comparison to many respondents plans for longer service employees UCRP provides a very generous benefit formula in the universe of all retirement plans, both DB and DC UCRP is not as constrained by the tax limits on compensation as are almost all of the respondents. Therefore, while many respondents purport to take into account more than X compensation, in reality they cannot do this for higher paid faculty because of the tax limits. William M. Mercer, Incorporated University of California

8 Data Highlights: Compensation Model The University of California uses an XYZ model, as do most of the survey participants. No. of Orgs. Base/Fixed Compensation Supplemental Negotiated Compensation Incentive/Bonus/ Contingent Compensation Other 1 1 University of California Compensation Covered by Retirement Plans 1 of the 1 participants (%) determine retirement benefits on compensation greater than the base/fixed level. 8 participants use base/fixed compensation as does UC. The responses from all 1 participants were as follows: No. of Orgs. Base/Fixed Compensation Supplemental Negotiated Compensation Incentive/Bonus/ Contingent Compensation Other 8 1 University of California Prevalence of plan types 18 of 1 participants provide defined contribution (DC) plans (or choice of plan) as their primary retirement plan. have defined benefit (DB) plans (or choice of plan) as primary plan. UC provides a DB plan. One participant has both DB and DC listed as primary plan. Another participant includes a choice of a DB and DC plan as the primary plan. William M. Mercer, Incorporated University of California

9 Make-up Plans Some institutions provide make-up plans to employees which are defined as plans that restore some of the benefits lost due to Internal Revenue Code limitations. UC provides one such makeup plan for benefits lost due to the application of IRC Section 1(b) (which limits the annual benefits that can be paid from UCRP). Another make-up plan feature of UCRP to make up benefits lost due to the compensation limit of IRC Section 1(a)(1) is currently being reviewed by the IRS. By comparison, few of the survey participants provide make-up plans. The actual breakdown depends on the type of plan and is detailed later in this report. William M. Mercer, Incorporated University of California

10 Background Survey Scope The University of California HR/ Benefits retained William M. Mercer, Incorporated to conduct a survey designed to capture information about faculty and clinical physician retirement benefits and compensation issues that affect retirement benefits. The survey was designed to answer the following questions: Are retirement benefits for UC faculty competitive given that base salary (X compensation) is the only form of compensation upon which benefits are determined? What is the prevailing definition of compensation on which retirement benefits are determined? What types of retirement plans are most prevalent? How prevalent are make-up plans that restore retirement benefits lost as a result of the Internal Revenue Code Section 1(a)(1) and 1 limits? How does the structure of the University of California s retirement plan compare with the plans provided by other leading institutions? Survey Methodology The survey was conducted during the fourth quarter of and the first quarter of 1. A questionnaire was sent to leading medical organizations, the vast majority of which comprise the nation s elite medical schools. Mercer screened participant responses and follow-ups were made where necessary to obtain missing information and/or to clarify responses. William M. Mercer, Incorporated 8 University of California

11 Participating Organizations Twenty-one (1) organizations submitted data on their benefit practices. Organizational governance varies among participants with an almost equal division between public and private: N= N=1 N=8 For Profit Organizations Public Institutions Private Institutions The following organizations participated in the survey: Organization City State Baylor College of Medicine Houston TX Columbia University School of Medicine New York NY Group Health Permanente, P.C. Seattle WA Johns Hopkins University Baltimore MD Keck School of Medicine of University of Southern California Los Angeles CA Loma Linda University School of Medicine Loma Linda CA Private Diagnostic Clinic, PLLC at Duke University Durham NC Southern California Permanente Medical Group Pasadena CA Stanford University School of Medicine Stanford CA State University of New York at Buffalo Buffalo NY The Permanente Medical Group Oakland CA University of Florida College of Medicine Gainesville FL University of Illinois at Chicago Chicago IL University of Michigan Ann Arbor MI University of North Carolina - Chapel Hill School of Medicine Chapel Hill NC University of Pennsylvania School of Medicine Philadelphia PA University of Texas Southwestern Medical Center Dallas TX University of Virginia Charlottesville VA University of Washington Physicians Seattle WA Washington University School of Medicine St. Louis MO Yale University School of Medicine New Haven CT William M. Mercer, Incorporated 9 University of California

12 General Participant Information Legal Structure of the Health Sciences Practice Plan Academic Institutions Only Like the University of California, in most of the 18 participating academic institutions, the practice plan is part of the University. The responses were as follows: N=1 N=1 N= Part of University/School of Medicine Separate Not For Profit Corporation Separate For Profit Corporation One institution indicates a two-part program - university and separate not-for-profit corporation. Its responses are included in both of those categories. Model That Best Describes the Relationship of the Health Sciences Practice Plan with the Overall Academic Medical Center or Health System Like the University of California, in most of the 18 participating academic institutions, the practice plan is medical school based. The responses were as follows: N= N= N=1 Medical School Based Hospital Based Health System Based William M. Mercer, Incorporated 1 University of California

13 General Compensation Model Used for Health Sciences Faculty and Clinical Physicians The University of California uses an XYZ model, as do most of the survey participants. No. of Orgs. Base/Fixed Compensation Supplemental Negotiated Compensation Incentive/Bonus/ Contingent Compensation Other 1 1 University of California The three organizations with other responses are: Base/fixed compensation plus fee income Base/fixed compensation plus hospital plus practice plan Base/fixed compensation plus additional compensation from a not-for-profit corporation All three of these organizations use base/fixed compensation to determine benefits for their primary retirement plans. Professional Compensation Paid by an Entity Other Than the University Only of the 18 academic institutions indicate that a significant portion of professional compensation is paid by an entity other than the university. Of these, the compensation model utilized is as follows: No. of Orgs. Base/Fixed Compensation Supplemental Negotiated Compensation Incentive/Bonus/ Contingent Compensation Other 1 (Clinical Practice Income) The types of organizations providing the outside compensation are as follows: of the indicate that the compensation is paid by a not for profit corporation. William M. Mercer, Incorporated 11 University of California

14 1 of the indicates that the compensation is paid by a for profit corporation. 1 of the indicates that the compensation is paid by a foundation. William M. Mercer, Incorporated 1 University of California

15 Retirement Programs Primary Retirement Plan Offered for Health Sciences Faculty and Clinical Physicians All of the participants offer one or more employer-provided retirement plans. The breakdown of the responses is as follows: N=1 N= N=1 Defined Benefit Plan Defined Contribution Plan Choice of DB or DC Plan Defined contribution plans are much more prevalent than defined benefit plans One institution offers two primary retirement plans - a defined benefit plan and a defined contribution plan. Its responses are included in both of those categories. Compensation on Which Benefits Provided by Primary Retirement Plan Are Determined 1 of the 1 participants (%) determine retirement benefits on compensation greater than the base/fixed level. 8 participants use base/fixed compensation. The responses from all 1 participants were as follows: No. of Orgs. Base/Fixed Compensation Supplemental Negotiated Compensation Incentive/Bonus/ Contingent Compensation Other 8 1 University of California William M. Mercer, Incorporated 1 University of California

16 Participants that provide a defined benefit plan (or a choice of such a plan) as the primary retirement plan are much more likely to determine benefits on base/fixed compensation (as does the University of California) than are participants that provide a defined contribution plan (or a choice of such a plan). Type of Plan Base/Fixed Compensation Total Negotiated Compensation Total Compensation Other Total Defined Benefit Plan 1 1 Defined Contribution Plan 1 1 Tax Qualified Defined Benefit (DB) Plan Provisions of the 1 participants (%) provide a defined benefit plan. All of these participants consider this plan (or a choice of this plan) as their primary retirement plan. One institution does offer two primary retirement plans a DB and a DC plan. Its responses are included in both categories. Basis for DB Plan Benefits All of the plans determine benefits on final average compensation. The participants define final average compensation as follows: -Year Avg. -Year Avg. -Year Avg. Total No. of Orgs. 1 1 University of California Pension Spiking in DB Plans of the participants indicate that they have provisions in their plans that prevent or limit pension spiking (i.e., significant increases in benefits for all years of service through increases in compensation for final years service). Because of confidentiality issues related to the limited number of responses, plan details cannot be disclosed. Retirement Normal retirement age is defined as follows: Age Age Age Total No. of Orgs. 1 (1) University of California (1) Normal retirement age is ; however, benefits are unreduced at age. William M. Mercer, Incorporated 1 University of California

17 All of the plans that use age permit early (prior to age ) retirement with unreduced benefits, based on a combination of age and service Cost of Living Increases 1 plan provides for automatic cost of living increases. plans provide ad-hoc increases. plans do not provide increases. The University of California plan provides for an automatic annual cost of living increase as well as ad-hoc increases. 1(a)(1) Limits The 1(a)(1) limit restricts the amount of annual compensation that can be used in calculating the benefit provided by a tax qualified defined benefit plan. The 1 limit for taxable organizations is $1,. The recently signed Economic Growth and Tax Relief Reconciliation Act (EGTRRA) increased the limit to $, for. of the academic institutions ( out of when including organizations that are not academic institutions) with a defined benefit plan indicate a 1(a)(1) limit of $1,. The University of California and 1 other institution indicate a higher limit for certain grandfathered employees. The limit is $8, for grandfathered employees of UC who were hired before /1/9. Approximately % - % of health sciences faculty and clinical physicians from the surveyed institutions have plan compensation in excess of the limit for private sector employees and non-grandfathered public sector employees. 1(a)(1) Make-up Plans participants provide a nonqualified make-up plan for the 1(a)(1) limit. Currently, the University of California has a plan under review by the IRS to effectively provide a make-up plan for the 1(a)(1) limit through UCRP. Because of confidentiality issues related to the limited number of responses, plan details cannot be disclosed. Because UC operates on a fiscal year basis, the EGTRRA increases to the IRC limits do not become effective for UCRP until July 1,. William M. Mercer, Incorporated 1 University of California

18 1 Limits The 1 limit restricts the annual benefit that can be paid out of a qualified defined benefit plan. Less than % of health sciences faculty and clinical physicians have employer provided plan benefits restricted by the 1 limit. participants provide a nonqualified make-up plan for the 1 limit - as does the University of California. Because of confidentiality issues related to the limited number of responses, plan details cannot be disclosed. Tax Favored Defined Contribution Plan Provisions 19 of the 1 participants (9%) provide a tax favored defined contribution plan with employer contributions (a (b) plan, a 1(a) plan - such as a money purchase pension plan, a profit sharing plan or an eligible (b) plan). 18 of these participants consider this plan (or a choice of this plan) as their primary retirement plan. Plans With Employer Matching Contributions of the 19 plans (%) include a matching feature under which the employer matches all or part of the contribution made by the faculty member or physician. The average maximum match is 1% on % of pay. of these plans provide non-matching contributions in addition to matching contributions. The average employer non-matching contribution is % of pay. Plans Without Employer Matching Contributions 1 of the 19 plans (%) do not include a matching feature. Plan designs vary widely. plans provide a fixed percentage contribution to all faculty or physicians, regardless of age or pay. The average fixed contribution for these plans is 1% of pay. plans integrate the employer contributions with the Social Security Taxable Wage Base. The average employer contribution is.% up to the Taxable Wage Base and 11% above the Taxable Wage Base. of the plans determine employer contributions on age. William M. Mercer, Incorporated 1 University of California

19 Contributions for younger (under age ) faculty and physicians range from % - 9% of pay. Contributions for older (over age ) faculty and physicians range from 1% - 1% of pay. 1(a)(1) Limits The 1(a)(1) limit (the amount of annual compensation that can be used in calculating the benefit provided by a tax qualified defined contribution plan) for taxable organizations in 1 is $1,. EGTRRA increased the limit to $, for. 1 of the 1 academic institutions (18 out of 19 when including organizations that are not academic institutions) with a defined contribution plan indicate a 1(a)(1) limit of $1,. 1 institution indicates a higher limit for certain grandfathered employees. We asked the 19 organizations with DC plans to indicate what percentage of their health sciences faculty and clinical physicians have plan compensation in excess of the current 1(a)(1) limit. The results are shown in the table: No. of Orgs. None Less than % % - % More than % No Response 1 1(a)(1) Make-up Plans participants provide a non-qualified make-up plan for the 1(a)(1) limit. participants do not provide a make-up plan, but instead provide additional cash to make up for benefits lost because of the 1(a)(1) limit. All of the participants with make-up plans indicate that all faculty members or clinical physicians with plan compensation in excess of the 1(a)(1) limit are eligible for the make-up plan. Plan formulas and the definition of compensation are the same as those in the defined contribution plans. participants limit the make-up plan compensation to amounts ranging from $, - $,. William M. Mercer, Incorporated 1 University of California

20 Funding for the plan benefits vary, as shown in the following table: No. of Orgs. Funds not set aside in advance Funds set aside 1 Limits Health sciences faculty and clinical physicians that have defined contribution plan contributions restricted by the 1 limit are shown in the table: No. of Orgs. None Less than % 1 % - % 1 More than % No Response 1 1 Limit Make-Up Plans participants with defined contribution plans provide a nonqualified make-up plan for benefits lost because of the 1 limit. Because of confidentiality issues related to the limited number of responses, plan details cannot be disclosed. Other Types of Retirement Plans Provided to Health Sciences Faculty or Clinical Physicians 18 of the 1 participants (8%) provide a defined contribution savings retirement plan, as does UC. This is a plan for employee contributions only and is used to supplement employer-provided retirement plans. 1 of the 18 plans (%) define plan compensation as W- earnings - as does the University of California. The remaining plans use a portion of W- earnings, with base/fixed compensation being the most prevalent definition. Make-up plans to restore benefits lost because of the 1(a)(1) and 1 limits are not prevalent. Only 1 participant indicates the existence of a make-up plan for employee contributions. William M. Mercer, Incorporated 18 University of California

21 of the 1 participants (%) provide some other employer-provided deferred compensation plan, such as a supplemental executive retirement plan (SERP), an eligible (f) plan, or an individually negotiated plan or agreement. Plan designs vary widely. Because of confidentiality issues related to the limited number of responses, plan details cannot be disclosed. William M. Mercer, Incorporated 19 University of California

22 Competitiveness of Retirement Benefits Methodology One way to measure the competitiveness of an institution s retirement program is to compute the lump sum present values of the employer-provided retirement benefits and to compare those values to the values of the benefits provided by the institution s peer organizations. Employee profiles compared In making comparisons, it is important to look at a number of different employee profiles and to look at a range of termination and retirement ages to determine the competitive value of the benefits. This is the case for several reasons, for example: Some plan designs are more competitive for new hires than for employees with significant past service, or are more competitive for younger employees than for older. For employees who have significant compensation in addition to base/fixed compensation, plans that include base/fixed compensation only are typically less competitive than plans that include compensation in excess of base/fixed compensation. Mercer compared the benefits provided by the University of California to the benefits provided by the 1 survey participants. In performing these comparisons, Mercer used five basic employee profiles. Each profile is defined by age, service and base/fixed compensation ( X-Pay ). The five profiles are as follows: Profile Name Age Service X-Pay 1 Full Career New Hire $, 1 Mid-Career New Hire Lower Pay $1, Current Employee Lower Pay 1 $1, Mid-Career New Hire $, Current Employee Higher Pay 1 $, 1 Full career and mid-career new hires are employees hired at the start and in the middle of their working lives, respectively. We calculate retirement plan values for them at different ages of termination or retirement, as set out below. Current employees are faculty who are presently employees and therefore currently have the indicated years of service under UCRP. William M. Mercer, Incorporated University of California

23 Y Pay In order to determine the effect of Y pay, benefit values for each of the four basic profiles were calculated with three different levels of this pay -- Y-Pay was defined as %, 8%, or 1% of X-Pay. Z pay was not included in the calculations. Length of Plan Participation For each of the four basic profiles, retirement plan benefit values were calculated for the following five different lengths of service: Termination years from today Termination 1 years from today Retirement at age Retirement at age Retirement at age * Note that if a profile would be eligible for early retirement at one or both of the two termination ages (e.g., an employee currently age who terminates 1 years from today) only the retirement value was calculated. Valuing Defined Benefit Plans For comparator defined benefit plans, the methodology for valuing benefits is as follows: The lump sum value in the event of termination is the value of the accrued benefit at date of termination payable at normal retirement age The lump sum value in the event of retirement is the value of the immediately payable retirement benefit. Valuing Defined Contribution Plans For defined contribution plans, the methodology for valuing benefits is as follows: The lump sum value in the event of either termination or retirement is the account balance. Effect of Tax Limits Benefits under UCRP are currently limited by the Internal Revenue Code Section 1(a)(1), which restricts the amount of compensation that can be taken into account in calculating benefits ($1, for employees hired after July 1, 199 and $8, for grandfathered employees hired prior to July 1, 199; the $1, limit increases to $, in as a result of the new EGTRRA legislation; the $8, is unchanged by the legislation). The University has adopted an amendment to UCRP, effectively removing that limit. The amendment is pending IRS approval. In order to measure the effect on the University s William M. Mercer, Incorporated 1 University of California

24 competitive position if the limit were to be removed, benefits under UCRP were calculated both with and without the limit. Assumptions Used in Valuing Plan Benefits The various assumptions utilized for our analysis for valuing benefits are outlined below. 1. Projected pay and IRS benefit limitation assumptions: Average annual salary increases by age group: < :.%; -9:.%; -9:.%; -9:.9%; +:.% Consumer Price Index increase:.% Social Security Taxable Wage Base increase:.% - [This is the maximum amount of earnings that are subject to Social Security Tax ($8, for 1) and affects the contributions to and/or benefits provided by some plans in the Survey other than UCRP].. Defined Contribution plans Investment earnings on defined contribution plan balances: 8% per annum Employee contributions are included at a rate of % of total (X + Y) pay per year.. Valuation of Defined Benefit plan benefits: Mortality: Blended 198 Group Annuity Table UCRP present values: -- Retirements at age or older: Based on UCRP's Lump Sum Cashout factors. -- Terminations before age : Based on the present value of the retirement benefit at age, discounted to current age using a.% discount rate and allowing for a preretirement COLA of % per year. Comparator plan present values: Present values based on.% interest and 198 Group Annuity Table. IRS Limitations: Section 1(a)(1) -- UCRP plan compensation is currently limited by the Internal Revenue Code section 1(a)(1). This limit is $1, for 1 (or $8, for those hired before /1/199) Approval of an amendment to UCRP to effectively eliminate this limit is currently pending approval by the IRS. For this reason, projected benefit values are shown both with and without the limit. Effective 1/1/, the 1(a)(1) limit will increase from $1, to $, due to the EGTRRA legislation. For this reason, separate illustrations are included to reflect comparisons after this change. Since UC operates on a fiscal year basis, the increase to the 1(a)(1) won t affect UC participants until /1/. William M. Mercer, Incorporated University of California

25 Section 1 -- For UCRP, Internal Revenue Code Section 1(b) was not applied, due to the 1(m) restoration plan which effectively eliminates this limit. For comparator plans, this limit was applied when there was no make-up plan. We also considered the impact of increased Section 1 limits under EGTRRA for competitor plans that do not provide a make-up plan. Sample Calculation Illustrated below are two sample calculations similar to those in the pages that follow. These examples show how the present value of total retirement plan benefits build up over a career. We illustrate how UCRP compares with a typical comparator program. For this purpose we have chosen a DC plan which provides an employer contribution of 1% of pay per year, based on both X and Y compensation. This is around the median of the employer contribution to plans in the comparator group. Example 1 illustrates the values of the employer provided benefits only for UCRP versus the typical comparator program. Example illustrates the values of employer plus employee provided benefits and contributions. The values shown for UC are the total of the UCRP present value of benefits and the accumulated value of % contributions based on total negotiated compensation (X+Y) to UC s defined contribution plans. The values shown for the typical comparator plan are the accumulation of the 1% employer contribution and an additional % employee contribution based on total (X+Y) pay. The assumptions used for the projections are as described above. See the Appendix for a more detailed calculation. William M. Mercer, Incorporated University of California

26 Example 1 Comparison of Retirement Benefits Employer Provided Benefits Only: UCRP versus Typical Survey Participant $,, $,, $,, $1,, $ $,18, $1,81, Value of UCRP Benefit Typical Program: 1% Employer Contribution $, $ Age Example Comparison of Retirement Benefits Employer Provided Benefits and % Employee Contributions: UCRP versus Typical Survey Participant $,, $,, $,, $,,9 $,, $1,, $ Value of UCRP Benefit + % Employee Contribution Typical Program: 1% Employer Contribution + % Employee Contribution $, $ Age William M. Mercer, Incorporated University of California

27 Example 1 Employer Provided Benefits Only A numerical illustration of the values at age follows. Member aged at hire; X Pay = $,; ($, per month) Total (X+Y) pay = X pay + % * X pay = $8, UC Retirement Program A. Present Value of UCRP benefits: $,18, 1. Projected Highest Average Plan Compensation (HAPC) based on monthly X pay only: $, increased using the estimated salary increases shown in the assumptions section and averaged over months: $, Less Social Security offset: ($1 per month) = HAPC: $,. Age factor at age :.%. Service at age : years. Monthly pension: 1.*.*. = $1,.. Lump Sum Cashout Factor at age : 1.. Present Value of UCRP benefits at age :.*. = $,18, Typical Comparator Plan: A. Projected accumulated value at age of employer contributions of 1% of X+Y pay: $1,81, William M. Mercer, Incorporated University of California

28 Example Employer plus Employee Provided Benefits and Contributions A numerical illustration of the values at age follows. Member aged at hire; X Pay = $,; ($, per month) Total (X+Y) pay = X pay + % * X pay = $8, UC Retirement Program A. Present Value of UCRP benefits: $,18, 1. Projected Highest Average Plan Compensation (HAPC) based on monthly X pay only: $, increased using the estimated salary increases shown in the assumptions section and averaged over months: $, Less Social Security offset: ($1 per month) = HAPC: $,. Age factor at age :.%. Service at age : years. Monthly pension: 1.*.*. = $1,.. Lump Sum Cashout Factor at age : 1.. Present Value of UCRP benefits at age :.*. = $,18, B. Projected accumulated value at age of employee contributions of % of X+Y pay: $,191 C. The total present value of benefits from the UC programs is: $,18, +,191 = $,, Typical Comparator Plan: A. Projected accumulated value at age of employer contributions of 1% of X+Y pay: $1,81, B. Projected accumulated value at age of employee contributions of % of X+Y pay: $,191 C. The total present value of benefits from the typical peer employer is: $1,81, + $,191= $,,9 William M. Mercer, Incorporated University of California

29 Introduction to Detailed Comparison of Retirement Plan Values The graphs on the following pages illustrate how UC retirement benefits compare with the survey data. The UC benefits are compared with the median from the survey data. In addition, the ranking of UC compared with other survey participants is shown (i.e., 1 being the highest, 1 being the lowest) above the appropriate bars. For these comparisons, both employer and employee provided benefits and/or contributions are shown to illustrate the total retirement benefits provided. Employee contributions are calculated consistently for both UC and the survey participants in order to maintain the validity of the comparison. In each case, we assumed an employee contribution of % of compensation up to the applicable 1(a)(1) limit. The recently signed 1 Economic Growth and Tax Relief Reconciliation Act makes numerous changes for retirement plans, including increased contribution and benefit levels. We have provided the comparisons between UC retirement benefits and other plans in the survey both before and after consideration of this Act. The charts labeled After Pension Reform Law Changes incorporate all the relevant provisions of the new legislation. For the employee with X compensation of $,, only one example is provided, since the revised limits will have almost no impact on such an employee. As the law currently stands, all provisions of the Act cease on December 1, 1. This was done for budgetary reasons, and the provisions may or may not survive beyond that date. In the following analysis, we assumed that the provisions would survive. William M. Mercer, Incorporated University of California

30 Lump Sum Present Value of Employer-Provided Retirement Benefits Full Career New Hire Age = ; Service = ; X-Pay = $,,, Y-Pay = % X-Pay Present Value of Benefit,,,,,, 1,, UC w/ 1(a)(1) UC w/o 1(a)(1), Y-Pay =8% X-Pay Present Value of Benefit,,,,,, 1,, UC w/ 1(a)(1) UC w/o 1(a)(1) , Y-Pay = 1% X-Pay,,,, UC w/ 1(a)(1) UC w/o 1(a)(1) 1 1,,,, 1,,, Note: The numbers superimposed on the bars represent the ranking of UC relative to the other 1 organizations. William M. Mercer, Incorporated 8 University of California

31 Mid-Career New Hire Lower Pay Age = ; Service = ; X-Pay = $1, Before Pension Reform Law Changes,, Y-Pay = % X-Pay UC w/ 1(a)(1) UC w/o 1(a)(1) UC w/ 1(a)(1) Y-Pay = 8% X-Pay,, UC w/o 1(a)(1) UC w/ 1(a)(1) Y-Pay = 1% X-Pay Present Value of Benefit,, UC w/o 1(a)(1) Mid-Career New Hire Lower Pay Note: The numbers superimposed on the bars represent the ranking of UC relative to the other 1 organizations. William M. Mercer, Incorporated 9 University of California

32 Mid-Career New Hire Lower Pay Age = ; Service = ; X-Pay = $1, After Pension Reform Law Changes,, Y-Pay = % X-Pay UC w/ EGTRRA UC w/o 1(a)(1) UC w/ EGTRRA UC w/o 1(a)(1) Y-Pay = 8% X-Pay,, UC w/ EGTRRA UC w/o 1(a)(1) Y-Pay = 1% X-Pay Present Value of Benefit,, Note: The numbers superimposed on the bars represent the ranking of UC relative to the other 1 organizations. William M. Mercer, Incorporated University of California

33 Current Employee Lower Pay Age = ; Service = 1; X-Pay = $1, Before Pension Reform Law Changes,, Y-Pay = % X-Pay Present Value of Benefit,,,,,,,,,, 1,, UC w/ 1(a)(1) UC w/o 1(a)(1) 9 9, Y-Pay =8% X-Pay,,,,,,,,,, 1,, UC w/ 1(a)(1) UC w/o 1(a)(1) 11 11, Y-Pay = 1% X-Pay,,,,,,,,,, 1,, UC w/ 1(a)(1) UC w/o 1(a)(1) 1 1, Note: The numbers superimposed on the bars represent the ranking of UC relative to the other 1 organizations. William M. Mercer, Incorporated 1 University of California

34 Current Employee Lower Pay Age = ; Service = 1; X-Pay = $1, After Pension Reform Law Changes,, Y-Pay = % X-Pay Present Value of Benefit,,,,,,,,,, 1,, UC w/ EGTRRA UC w/o 1(a)(1) 1 1, Y-Pay = 8% X-Pay,,,,,,,,,, 1,, UC w/ EGTRRA UC w/o 1(a)(1) 11 11, Y-Pay = 1% X-Pay,,,,,,,,,, 1,, UC w/ EGTRRA UC w/o 1(a)(1) 1 1, Note: The numbers superimposed on the bars represent the ranking of UC relative to the other 1 organizations. William M. Mercer, Incorporated University of California

35 Mid-Career New Hire Higher Pay Age = ; Service = ; X-Pay = $, Before Pension Reform Law Changes,, Y-Pay = % X-Pay Present Value of Benefit,,,,,,,, 1,, UC w/ 1(a)(1) UC w/o 1(a)(1) 1, Y-Pay =8% X-Pay,,,,,,,, 1,, UC w/ 1(a)(1) UC w/o 1(a)(1) 1, Y-Pay = 1% X-Pay,,,,,,,, 1,, UC w/ 1(a)(1) UC w/o 1(a)(1), Note: The numbers superimposed on the bars represent the ranking of UC relative to the other 1 organizations. William M. Mercer, Incorporated University of California

36 Mid-Career New Hire Higher Pay Age = ; Service = ; X-Pay = $, After Pension Reform Law Changes,, Y-Pay = % X-Pay Present Value of Benefit,,,,,,,, 1,, UC w/ EGTRRA UC w/o 1(a)(1) 1, Y-Pay = 8% X-Pay,,,,,,,, 1,, UC w/ EGTRRA UC w/o 1(a)(1) 1, Y-Pay = 1% X-Pay,,,,,,,, 1,, UC w/ EGTRRA UC w/o 1(a)(1), Note: The numbers superimposed on the bars represent the ranking of UC relative to the other 1 organizations. William M. Mercer, Incorporated University of California

37 Current Employee Higher Pay Age = ; Service = 1; X-Pay = $, Before Pension Reform Law Changes Y-Pay = % X-Pay 9,, 8,,,,,,,,,,,,,, UC w/ 1(a)(1) UC w/o 1(a)(1) 1,, Y-Pay =8% X-Pay 9,, 8,, UC w/ 1(a)(1) UC w/o 1(a)(1),,,,,,,,,,,, 1,, Y-Pay = 1% X-Pay 9,, 8,, UC w/ 1(a)(1) UC w/o 1(a)(1) Present Value of Benefit,,,,,,,,,,,, Note: The numbers superimposed on the bars represent the ranking of UC relative to the other 1 organizations. William M. Mercer, Incorporated University of California

38 Current Employee Higher Pay Age = ; Service = 1; X-Pay = $, After Pension Reform Law Changes 9,, Y-Pay = % X-Pay 8,,,,,,,,,,,,,, ` UC w/ EGTRRA UC w/o 1(a)(1) 1,, Y-Pay = 8% X-Pay 9,, 8,,,,,,,,,,,, UC w/ EGTRRA UC w/o 1(a)(1),, 1,, Y-Pay = 1% X-Pay Present Value of Benefit 9,, 8,,,,,,,,,,,, UC w/ EGTRRA UC w/o 1(a)(1),, Note: The numbers superimposed on the bars represent the ranking of UC relative to the other 1 organizations. William M. Mercer, Incorporated University of California

39 Overall Observations The University of California retirement program appears to be competitive for the initial profiles selected and under the assumptions stated, with the following exceptions: UCRP generally ranked lower for employees with shorter service and lower X compensation (e.g. $,). Also, for employees with lower X compensation, UCRP decreases in the rankings as the level of Y compensation increases. However, UCRP can be competitive for employees with longer service and lower base pay if their Y compensation is relatively moderate in relation to their X compensation (e.g. when Y is % of their base pay as opposed to 8% or more). The UCRP is not very competitive for individuals who join at a young age and leave prior to eligibility for retirement The UCRP will become more competitive as base pay increases above 1(a)(1) compensation limits, if Appendix E is approved by the IRS The UCRP remains competitive for individuals with base pay in excess of $1,, regardless of the level of Y-Pay, because many of the retirement plans provided by the survey participants do not cover compensation in excess of $1, The UCRP does particularly well for high paid employees hired prior to July 199 due to the grandfathered Section 1(a)(1) limits, which allow the UCRP to base benefits on up to $8, of compensation, while most surveyed plans are limited to $1, The passage of EGTRRA does not have a significant impact on the overall competitiveness of the UCRP William M. Mercer, Incorporated University of California

40 Glossary TERM DEFINITION 1. Benefit Formula The provision in the qualified defined benefit plan which describes the annual benefit a participant will receive at retirement (e.g., % of the final -year average compensation per year of service). Eligible (b) Plan A deferred compensation plan that is maintained by an eligible employer a state or local government or a non-church, nongovernmental tax-exempt organization- and that also meets statutory requirements.. 1(a)(1) Limit The maximum amount of annual compensation that can be used in calculating most tax favored retirement plan benefits (e.g., generally, $1, for private sector plans). The limit will increase to $, for due to the new 1 EGTRRA legislation.. 1(k) Plan A defined contribution plan established by a taxable or nontaxable organization (or a grandfathered government 1(k) plan) under Section 1(a) of the Internal Revenue Code. The plan provides participants with the opportunity to contribute pre-tax salary deferrals to their accounts (e.g., participants may defer up to 1% of their salaries and the employer matches $1 for $1 the first %).. (b) Plan A defined contribution plan established by a section 1(c)() organization or public educational organization under Section (b) of the Internal Revenue Code. The plan permits salary reduction contributions and may permit employer matching and/or non-matching contributions (also referred to as a TSA Plan or Tax Sheltered Annuity Plan ). William M. Mercer, Incorporated 8 University of California

41 TERM. 1 (c) limit (defined contribution plans) 1(b) limit (defined benefit plans) DEFINITION In the case of a qualified defined contribution plan or (b) plan, annual contributions plus any other annual additions are limited to the lesser of $, or % of a participant s compensation. This limit will change in to the lesser of $, or 1% of a participant s compensation due to EGTRRA. In the case of a qualified defined benefit plan, benefits are limited to the lesser of $1, or 1% of the participant s average compensation for the participant s highest three years (but, if a government plan, only limited to $1,). This limit will change to $1, for due to EGTRRA. For participants who retire before their Social Security Retirement Age between ages and depending on year of birth the 1(b) limit is reduced based on actual retirement age.. (g) Limit In the case of a qualified 1(k) or (b) plan, annual employee deferrals are limited to $1,, indexed for inflation. 8. Ineligible (f) Plan A non-qualified plan offered by tax-exempt organizations and government employers used to provide retirement benefits and compensation-deferral opportunities to certain employees, but requires a substantial risk of forfeiture to avoid current taxation (i.e., generally, the employee must keep working to receive the benefits). 9. Lump Sum Present Value A single sum payment determined based upon the accrued benefit and actuarial provisions in effect on the date of payment. 1. Make-up Plan for the 1(a)(1) Limit An additional retirement plan designed to replace any benefits lost as a result of the prohibition against the qualified defined benefit plan and/or defined contribution plan considering compensation in excess of the 1(a)(1) limit (e.g., participant has compensation of $,; since only $1, is considered in the qualified plan, the make-up plan replaces benefits she would have earned if total compensation of $, had been used in the qualified plan) William M. Mercer, Incorporated 9 University of California

42 TERM DEFINITION 11. Make-up Plan for the 1 Limit An additional retirement plan designed to replace any benefits lost as a result of the prohibition against the qualified defined benefit plan and/or defined contribution plan providing benefits in excess of the 1 limit (e.g., in a qualified defined benefit plan, a participant is limited to annual benefits of $1,, but the formula would otherwise produce a benefit of $1,; the make-up plan would replace the benefit lost as a result of the 1 limit.). In a qualified defined contribution plan, the make-up plan would restore benefits lost due to the limit on annual additions of the lesser of $, or % of compensation. 1. Matching Feature An employer contribution to a qualified defined contribution plan or other tax favored defined contribution retirement plan which matches some portion of contributions made by participants (e.g., the employer matches $1 for $1 of the first % of compensation an employee contributes to the (b) plan). 1. Money Purchase Pension Plan A defined contribution plan established under Section 1(a) of the Internal Revenue Code which provides that the employer has a fixed obligation to make certain contributions to the plan each year (e.g., employer agrees to contribute an amount to each participant s account equal to % of the participant s compensation each year.). 1. Non-Qualified Plan A plan that provides benefits that are not payable under a Tax Qualified plan due to IRS limitations. 1. Other Deferred Compensation Plans A plan which is something other than a Tax Favored Defined Contribution Retirement Plan or a Tax Favored Defined Contribution Savings Retirement Plan such as a supplemental executive compensation plan, ineligible (f) plan, or some other plan designed to defer an employee s compensation. 1. Pension Spiking Significant increases in final years compensation that would significantly increase benefits for all years of service under a qualified defined benefit plan. 1. Portion of W- Earnings An amount less than all taxable income (e.g., base salary, excluding bonuses and incentive pay). William M. Mercer, Incorporated University of California