Tuesday, March 21, 2006

There are still plenty of critical questions that been given no definitive answers by either UC, LANS, or DOE

A well thought out comment from "good2go" on the

http://lanl-the-real-story.blogspot.com/2006/03/pension-bill-article-in-new-york-times.html

post:
_________________________________________


Most staff have received both their LANS employment offer and their
UC pension information in the mail. However, it seems to me that
LANS/DOE have giving out only the bare minimum of info to help LANL
staff decide their pension future. And even at this late date,
there are still plenty of critical questions that been given no
definitive answers by either UC, LANS, or DOE. A suspicious person
might wonder if they designed it to be this way.

Nevertheless, the May 15th "drop dead" date is approaching and
everyone must soon make up their minds. I thought it might be
helpful to post some important links and review some possible
risk/reward scenarios. For starters, get a copy of the UCRS
Benefits Percentage chart. This chart has years of Service Credit
along the Y-axis and years of Age Credit along the X-axis. I'm
amazed at the number of LANL staff who don't have a copy of this
chart. This critical chart should have been included in the
package which UC just mailed out. If you don't have one, here
is a link for obtaining this chart, plus some links to other
useful tools for performing some pension analysis:

------------------------------
-----------------------------

***** UCRP Pension Benefits Table *****

http://www.hr.ucdavis.edu/benefits/2rs/001


***** UC Retirement Plan *****

http://atyourservice.ucop.edu/online_actions/ucrpcalc/estimator.html


***** Compound Interest Calculator *****

http://www.moneychimp.com/calculator/compound_interest_calculator.htm

------------------------------------------------------------

With these tools in hand, let's have some fun! The first thing
you'll note about the Pension Percentage chart is that the percentage
for most employees goes up much faster with increasing age than it
does for years of service. This is because the chart is based on
actuarial tables that indicate your odds of death are going up
quickly as you approach the big "Six-O". Drats! I would rather
not know that.

Now, let's take a particularly case -- a poor fellow named Joe who
is a youngster at 55, but has 30 years of service credit with LANL.

Assume this fellow is a TSM who averages around $105 K per year and
he plans on walking out of LANL at the point at which Age Credit
stops increasing, which is age 60. If Joe truly believes that
the LANS TCP1 pension will always track the UC pension, he can
plan on leaving at age 60 with about 87% of his HAPC. This is
very, very enticing. However, the risks are not insignificant that
LANS may decides to reduce payouts rates in the next few years. I
conjecture that the odds of LANS doing so are much higher than the
odds are of UCRS taking this action. I base this on the fact that
the UCRS pool is huge and there would be strong political forces
which would counteract any desire for UCRS to take this action. The
same cannot be said for LANS. Therefore, by taking the LANS TCP1
route to achieve his goal, Joe has taken on greater risks but has
seen no increase in his rewards. (See DOE "substantial equivalent"
clause).

If Joe wants to minimize this particular risk he could decide to
lock-in his current UCRS assets by going inactive. By doing so,
he'll only get Age Credit for the next five years, but no build-up
of pension Service Credit. Thus, when he retires at age 60, he'll
get 75% of his HAPC, and not 87%. However, it is my understanding
that the UC COLA increases would be added to Joe's HAPC for the
intervening years between 55 to 60. Let's assume a 3% COLA figure.
Let's also assume that LANL raises will be at the same 3 % amount.
When Joe retires, his effective UC HAPC will then be about $122 K.
His UCRS lock-in of 75% will then buy him an annual payment of
$122 K x 75% = $ 91.5 K per year. If LANS keeps its TCP1 promise,
he would have been given $122 K x 87.5% = $106,750 per year. By
taking the inactive route, Joe has a shortfall of about $15 K/year.
Perhaps Joe can make this up with the TCP2 401K plan. Assuming
Joe is willing to take a drop in his current lifestyle by $10 K
per year and LANS matches this with a 9.5% match, he'll sock away
about $20 K per year into a retirement 401K. Assuming a reasonable
7% compounded return on this investment, he'll leave at age 60 with
an additional $123 K. If he invests this money after age 60 and
makes a more conservative 6 % return (after all, he's now in his
retirement years), he'll make an additional $7,380 per year during
his retirement. While this only covers for about half of the $15 K
shortfall, note that Joe has acquired access to $123 K in principal
from the 401K he now owns, and yet he only had to contribute $50 K
to this fund. The remaining $73 K was a "freebie" that came from
returns and the LANS matching cash. However, as with the TCP1 route,
Joe has taken on increasing risk via his 401K investments in the
markets, and yet has seen little in the way of additional rewards.
(See DOE "substantial equivalent" clause).

Another exercise that you might find interesting is to look at
calculations involving a UCRS lump-sum pay out. You can do these
calculations using the "UC Benefit Estimator" and the "Compound
Interest Calculator" links shown above. The primary advantages
of getting the lump-sum (which won't be available with TCP1)
include: (1) the ability to remove reliance on both a shrinking
pension pool and the investment acumen of the TCP1 trustees, and
(2) the chance to possibly pass on portions of your retirement
lump-sum to your kids. If you're worried about out-living your
lump-sum, you can always decide to use a portion of the lump-sum to
purchase an annuity. For an additional expense, you can also get
an inflation protected annuity and a spousal protected annuity.
Of course, if you take the lump-sum you'll pay a lot more for
medical coverage during your retirement years. Then again, LANS
may be playing us all for fools and suddenly decide to pull most
of the retiree medical benefits for all employees in the next
few years. It would not be unexpected, since this is what most
of corporate America has been doing to their retirees.


Other unknowns that can be thrown into this pension analysis are
as follows:

* LANS TCP1 staff may have to contribute significant amounts to the
new pension (say, around 5 % of salary?). Those who lock-in with
UCRS won't have to make any payments into a pension fund. They'll
no longer be UC employees and won't be members of the LANS pension.

* No one knows how much of our current assets in UCRS will be
transferred over to LANS TCP1. It is unlikely you'll know this
before the May 15th deadline. Thus, you'll have no information
on the *SINGLE MOST CRITICAL* data point in this whole analysis!!!

* Many people at LANL "game" the system by jacking up their HAPC
any way they can during the last few years of service. Since the
HAPC is a high 3 year average, taking on a Group Leader, Dep. Group
Leader, or other management positions can make a HUGE difference
in your retirement income. You don't even have to carry a manager
position very long to go this route. It's one of the reasons that
I think LANL has had such lousy managers over the years. People
who have no business being managers take this route simply to
"juice-up" their retirement benefits when they leave a few years
later. Those who have plans to play this game for a big, fat,
retirement income will probably be strongly inclined to follow the
TCP1 route.

* If LANS TCP1 pension is under-funded, there is a chance that
the TCP1 trustees will take the risky route of "juicing up" the
pension returns by turning over a portion of the pension assets
(say, 25%) to private equity management. The private equity
investment guys will promise high returns (like 20%), but it's
quickly becoming a fool's game. Many pension are going this route
to make up for short falls. For more info, check out the latest
issue of Forbes (Mar 13). It has a front cover with private equity
guys stealing wheel-barrows of cash from the pensions. Forbes
equates the shady actions of these guys with the type of things
the Mafia once did with pension funds. One of the biggest and
shadiest of the private equity managers is Carlyle Group (sound
familiar?). If you're interested in this subject, the Forbes
cover has the title "Bubble Buyout" and the article is entitled
"Private Inequity". It's a very interesting article. This is
a risk which I believe will be much greater for the LANS TCP1
pension than for the UCRS pension. The UCRS pension tends to
have lots of people who monitor its actions very closely.

Finally, I have heard some staff who seem to think that going
the TCP1 roll-over route, rather than the inactive route, will
somehow buy them some senority "brownie points" when we have a
future RIF. This is delusional thinking. When the RIF comes,
none of this will matter. Your most important protection during
the RIF will be to avoid being at the Wrong Place (ie, organization
or project) at the Wrong Time (ie, when your well-liked supervisor
has just left and the new supervisor doesn't know you or like
you very much). This is the lesson I learned after talking to
some of the people who got RIF'ed back in 1995. The fact that
you are a long-term LANL employee doesn't matter much in a RIF.
In fact, LANS may actually be more inclined to get rid of the
high cost, long term TCP1 staff, rather than the younger and
cheaper TCP2 staff. The only way that having a long-term record
with LANL will matter is in the area of severance pay. Current
UC severance policy is very generous to long-term LANL employees.
However, it remains to be seen how generous this policy will be
once LANS management takes over after June 1st.

In all of this analysis, it has become very apparent to me that
DOE is trying to shift future risks away from DOE and onto the
shoulders of the staff at LANL. However, even though we take on
increased risks, we don't seem to benefit from any chance of
increased rewards. LANL, and soon LLNL, are following a well
worn path that has become all too common throughout America.
Only those at the very top of the system seem to benefit from
this ugly process.


Comments:
Thanks for this post. I too have a lot of analysis of the transition decision pathways.

There often appears to be too little information, but so far for friends and acquaintances, I have been able to help them come to a supportable decision about what to do.

Once I digest your post and combine it with my information, I will try to create a little more clarity.

In the meantime, email me if you would like to know some of my work before I get a chance to clean it up for publishing here.

Thanks.
 
You're getting there good2go. Those of us who have built spreadsheets try to keep up with the latest. Some comments.

Appears as though LANS TCP2 will count LANL service credit toward the 401k match, so Joe with 30 years will get 6+5.5=11.5% from LANS into his 401k account, assuming he contributes 6% of his salary (Pg 7, LANS Benefit Summary).

It also appears as though if Joe goes inactive-vested into TCP2, he will be able to use his 30 years toward the TCP1 medical coverage, presumably 100% of the employer's contribution in Joe's case (Pg 6, LBS).

Examining some details of the previous post indicates that UC anticipates working up to a combined 16% employee/University contribution to UCRP over the next few years beginning July 2007. Percentages to be paid by UC employees and the University remain TBD. LANS need not follow suit for TCP1, of course.

As far as RIFS, see Question 040 under General Pension Questions on LANS's Transition Q&A website.
040 (New Q&A 3/20/06)
Q: If I am RIFed after transferring to LANS, what severance pay would I get? If I were inactive vested with UC and opted for TCP2 what would the severance pay be?
A: Severance under LANS TCP1 and TCP2 will be the same as currently with UC-LANL.

One thing that has some of us confused is why DOE is willing to pay for PBGC insurance for TCP1? None of the reasons we can come up with is positive. (Pg 2, NNSA Responses to Comments...Feb 13...)

Keep on analyzing...
 
good2go writes:

"However, the risks are not insignificant that
LANS may decides to reduce payouts rates in the next few years. I
conjecture that the odds of LANS doing so are much higher than the
odds are of UCRS taking this action. I base this on the fact that
the UCRS pool is huge and there would be strong political forces
which would counteract any desire for UCRS to take this action."

I don't disagree, but while it is true that UCRS is huge and politically connected, remember that the proposed UCRP-LANL will be neither. Hopefully, this proposal will not be approved, but I see no reason, yet, to believe otherwise. At such a critical time UC and DOE are being strangely quiet about it.

Subject to an up-to-date actuarial assessment, or a substantive modification to the proposal, UCRP-LANL will be born in deficit. Furthermore, barring supplemental funding on the part of UC and/or DOE, there will never be another nickel of contribution made to this so-called retirement fund. It's always possible, of course, that this congenital deficit will be made up through wise investment. It is far more likely, however, that UCRP-LANL will be unable to fund the retirement promised to lab retirees by UCRS, and benefits will have to be reduced.

As an aside, it's going to be difficult for many older lab staff to decide which path to take through the UC/LANS maze without knowing the ultimate disposition of UCRP-LANL. The Los Alamos Retirement Group has requested an extension of the contract until 9/30. In light of the uncertainty surrounding UCRP-LANL this may be a prudent step in order to truly give folks 60 days to make an informed decision.
 
I am concerned that UCRP-LANL may have time to pull the rug out before I can secure my lump sum on June 2nd. DOE and UC are being surprisingly quiet...LANS smug.
 
Try as I might, I can't seem to make any good case (except fear) for
not going the TCP1 route. Some of my colleagues at LANL who have
also looked at this data come to the same conclusion. If LANS
TCP1 does, indeed, keep tracking the UCRS pension payouts, it is
just too good to ignore. And before people start asking questions
like "I'm 45 with 15 years of service, what should I do?", I say:

Download the UCRS Benefits Percentage chart. Study it till it's
dog-eared and stained. If you take the time to really look it over,
you'll discover it is pure sweetness!

For example, here are some typical percentage growth rates for
someone who is currently age 50 with 20 years service at the lab:

Age-----Service----Yearly % Growth (Age+Service)
50 ------ 20 --------- 4.0
55 ------ 25 --------- 5.0
59 ------ 29 --------- 6.5

Look at that last figure very closely. If you are age 59 and stay
around for just one more year, your pension is going to suddenly pay
an additional 6.5% on your big, fat salary for the rest of your life.
This is huge! If you walk out at 60, your looking at receiving that
additional 6.5% gain for about 18 more years, based on an average
life span of 78. Do the math and you'll find that it would be very
hard to beat the TCP1 pension based solely on the data before us.

Going the TCP2 401K route with the LANS 5.5% non-match free-bie,
plus a 6% salary match, and it's still tough to beat this chart.
And remember, the final percentage you get on leaving LANL, say at
60, is going to keep coming year after year. I've even run some
calculations using a guy at 60, where the Age Credit cuts out and
you only get Service Credit growth at 2.5% each year. Even with
these guys, it seems to me that, based on the data before us and
assuming average life spans, the TCP1 plan appears to be the better
deal.

But, there's the rub -- based solely on the data before us. What are
the chances that DOE or LANS start to de-couple TCP1 from the UC
pension? Drats! There's that fear thing again!

Let's study this a bit further. Ignoring, for the moment, the
very worst case (ie, a pension meltdown), what might LANS or DOE
do to TCP1 in the future? I can think of 3 possible scenarios:

(1) They do what many companies did back in the late 90's and
go hybrid, with a combined 401K + defined benefit plan. If you
are a 50+ employee at that time, it will tend to cut down on the
growth rates shown above, but it wouldn't be the end of the world.

(2) They do an IBM/Verizon and freeze the pension. If only the
Service Credit part gets frozen, you'll still get Age Credit
accumulation till the day you walk out the front door. The
plus side on this is that you would be given a 401K to help
sweeten the deal. It would be like going "inactive" and taking
the TCP2, except it would happen sometime after the June 1st date.
In the meantime, before it hit, you would be able to get some
more sweetness off of the Benefits Percentage chart.

(3) They do a GM, and actually cut the pension payouts for
future retirees. Ouch! This one would really hurt. But GM
is a company that is beginning to hemorrhage cash and had to
take some drastic actions. Nobody wants their big SUVs. We
are not GM.

If we hit Case 3, then it would really hurt. But, still, you've
got to balance it out with what you might expect to gain by staying
with the very rich pay-outs based on the UCRS/TCP1 Percentage chart.

Before making any hasty decisions, I would advise people to study
this chart very carefully. If you can manage the fear, then maybe
TCP1 will be your best bet. Base solely on the data, it seems to
be the better deal. If you can't handle the fear, or simply think
that LANS or DOE are completely untrustworthy, then consider TCP2.
You'll get less money, but maybe the peace of mind you buy is
worth the cost. The biggest unknown I want cleared up is exactly
how much of my current assets in UCRS will be transfered into the
TCP1 pension. If we knew this, we would have a much better idea
regarding just how risky this new pension may be. This is part
of the new "risk" component that DOE has thrust upon us, and it
has no associated "reward" component to make it more palatable.

BTW, my complaints about LANS not giving definitive answers was partly
answered this afternoon. Just today (Mar 31), they posted over 150
new Q&A's on the LANS LLC site. Dig in, everybody...

http://lansllc.com/q&a.html

---
 
> A cautionary note about Ted's advice to double-dip
> (which I think is essentially good advice, nevertheless,
> all things considered).
Actually, I didn't advise either way on the double-dip part. Just mentioned that peace of mind is worth hundreds of thousands of dollars to me (and perhaps to others in my position) to forego TCP1 and its ties to DOE/LANS/LANL in the future, and instead do the inactive-vested/TCP2 route.
Issues:
1) medical: we do get medical (given the recent TCP2 revisions) and not just "access", even if retire early in TCP2, so that's no longer an issue
2) double dip: not clear to me, I'm asking a financial advisor for input. Personally, I don't need the cash-flow while working under TCP2, and anyway it'd get taxed as income (wouldn't it: retirement pension is taxed as income?). Maybe some of it can be sheltered by maxing out the 401K, perhaps even buying an annnuity -- I just dunno.
Issues:
1) medical: we do get medical (given the recent TCP2 revisions) and not just "access", even if retire early in TCP2, so that's no longer an issue
2) double dip: not clear to me, I'm asking a financial advisor for input. Personally, I don't need the cash-flow while working under TCP2, and anyway it'd get taxed as income (wouldn't it: retirement pension is taxed as income?). Maybe some of it can be sheltered by maxing out the 401K, perhaps even buying an annnuity -- I just dunno.
The issue is that if you have a lot of sick leave convertible to service credit, and want that on the UCRP side of things, then my understanding is you need to "retire" (draw down a monthly pension) within 120 days of separation (even though in this plan you're working at full salary under TCP2). Conceivably, it might be advantageous to forego the sick-leave converted to service credit if it means you don't have to start drawing the UCRP montly payment as taxable income within 120 days. Dunno, I'll be paying for some advice. But the sick-leave/service-credit "push" to double-dip is something I'd thought I mention as meriting some thought.
3) UCRP/LANL clone: we need to keep as much pressure on about this as possible (write to senators, Bodman, etc.). We were promised 60 days with full information, and this issue is not resolved. If it goes through, and UCRP-LANL becomes a stagnant pool of funds associated with ageing retired people who have no influence, then the differences between this and the TCP1 pool (both pools with no new employees, "guaranteed" by entities we don't trust) become small. TCP1 might look like a competitive option in that case: similar risk, but more lucrative.
 
Even after everyone runs their spreadsheets, it does seem that it really will get down to a decision based on one's confidence in the credibility of those providing the benefits. What makes the decision interesting is that the country does not appear to be at the high-water mark of governmental, business and other institutional credibility at this point in time.
 
In the hope that a little levity may be a welcome respite from all the serious deliberations underway, I offer the following observations:

With the emergence of the principal qualifier for the LANL transition, namely substantially equivalent, it is amusing to note that there exists a substantially equivalent synonym for it:

fungible (adj.): describes commodities that can be traded or substituted for an equal amount of a like commodity, usually to satisfy a contract

This in turn recalls a popular cautionary expression of the 1950s that may also be apropos, "Easy greasy; there's a fungus among us."
 
Here's a data point. Since I don't trust either UCRS or LANS, I retired and took the lump sum. Last week the money arrived.

Now I don't have to worry about unknowns (other than the stock market) and don't have anybody to blame (or congratulate) but myself.

Don't put your future into hands other than your own. Where do you think the "C" students went to work?
 
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