UI group looking at pension supplement
The University of Illinois is moving toward a supplemental pension program that would contribute money to a tax-deferred retirement savings plan for thousands of employees stung by the state's recent pension reform.
The package under consideration also would include matching contributions for employees who put money into their 403(B) retirement accounts, as well as additional help for prominent faculty and others affected by a new salary cap on pension benefits.
A university committee has been studying how the UI can alleviate the financial losses employees will incur under pension changes approved by legislators in November, which are also being challenged in court.
The plan cut cost-of-living increases on pension payments for current and future UI retirees, raised the retirement age for employees under the age of 46, and capped the amount of earnings that could be applied toward pensions, among other changes. It also lowered employees' contributions to the pension program from 8 percent to 7 percent, to offset some of those changes.
No plan has been put forward, but three major components are under consideration, said pension expert Jeffrey Brown, a UI professor of finance who serves on the university committee with administrators from the UI's three campuses.
— A university contribution to a tax-deferred 403(B) retirement account for every employee eligible for the State Universities Retirement System, which includes most UI workers (faculty, academic professionals and staff). A 403(B) plan is similar to a 401(K) plan commonly used in the private sector.
— A matching contribution for employees who set aside part of their pre-tax income to their 403(B), theoretically using the 1 percent no longer required by the state.
— Possible contributions for employees affected by the salary cap; the percentage would apply only to salary above that cap.
"Ultimately it's up to the board (of trustees) to decide what to do," said Brown, who briefed members of the campus senate's executive committee this week. The committee unanimously approved a resolution supporting the idea.
Brown declined to share possible contribution levels under discussion.
"It's still a work in progress," said Avijit Ghosh, senior adviser to UI President Bob Easter. "We are looking at a variety of different options."
The hope is to recommend a plan soon to trustees, who meet May 14 in Springfield. In January the board directed administrators to explore alternatives to the state-run pension plan.
"We would like to have something in place pretty soon," Ghosh said.
The first two ideas had been discussed before for employees hired since Jan. 1, 2011, who fall under a less-generous retirement plan known as Tier 2, Brown said.
Many universities already make matching contributions, and it's a common tool in the private sector to encourage employees to share the responsibility for their retirement, Brown said.
The UI lags its peers overall in funding employee retirement, according to a comparison prepared by an ad hoc compensation review committee headed by Brown.
The university contributes 7.5 percent of an employee's salary toward pensions — less than half the Big Ten average of 15.48 percent — while UI employees contribute 7 to 8 percent.
Most Big Ten schools contribute 6.2 percent to Social Security as well as 7 to 10 percent to a state pension plan for each employee. By contrast, Illinois' public employees do not participate in Social Security because the state opted not to join the system in 1983 when it was opened to federal, state and municipal workers.
Brown said the third piece of the supplemental package is designed to address that disparity and retain some of the UI's most distinguished professors — particularly in the College of Business, College of Law and College of Engineering, where higher salaries would run smack into the cap.
"I don't think the average person out there understands just how draconian a cut this is for current employees that are still a couple of decades away from retirement," Brown said.
For a 40-year-old professor who plans to work another 25 years, assuming 3 percent annual raises, "that one single provision cut their pension in half," Brown said.
"I probably get as many calls about that as I do about any other aspect of the pension bill," Brown said.
Hypothetically, Brown said, the university could kick in 2 percent for all employees, then another 2 percent matching contribution for those who put in 4 percent of their own money. That would help bring the UI within "reasonable" range of other Big Ten schools, he said.
"It won't come close to completely mitigating the effects of that salary cap," he said. "But at least we can make an effort to retain these folks."
The university has an existing 403(B) plan, open to all employees, but does not contribute to it. Ghosh said a fifth to a quarter of UI employees contribute to it.
The university will have to sort out complex accounting and legal questions before launching a supplemental plan — and figure out how to pay for it.
Each 1 percent of pay costs the campus about $7.5 million — though about $3 million of that is for employees of the UI's auxiliary services, such as housing or State Farm Center, which are supported by fees and outside income.
(This story has been edited to correct the percentages used in the hypothetical example.)
Big Ten retirement contributions
Most Big Ten schools contribute 6.2 percent to Social Security as well as 7 percent to 10 percent to a state pension plan for each employee. Their employees also contribute to both retirement programs, at varying levels. However, Illinois and Ohio State don't participate in Social Security.
Here are the totals:
|Big 10 average||10.91%||15.48||26.39%|
*School does not participate in Social Security
Source: UI Senate Ad Hoc Compensation Review Commitee, 2012 Study by Buck Consultants, updated December 2013