Pension trust fund benefits not guaranteed

Editor's note: This is the second in a three-part series titled "UM employee pensions: When a promise isn’t an obligation."

Consider this written guarantee: “Your promised pension benefits are an obligation of the state and they are secure.”

University of Missouri employees and retirees may believe that this quote describes their university and the State of Missouri’s obligations under the UM Defined Benefit Retirement Plan.

However, it does not; this assurance is not declared — and cannot be declared — anywhere by UM. And that is because the employee pension benefits are not a secured obligation of the University of Missouri nor the State of Missouri.

The quote actually comes from a different retirement plan, one that is employed by the other nine public four-year universities in the state: the Missouri State Employees’ Retirement System (MOSERS). Their benefits are guaranteed by the state and are augmented this year by a special $500 million state appropriation directly to the MOSERS trust fund.

Conversely, the UM pension trust fund receives no direct funding from the state. The university can fund the retirement trust with any money that it already controls (e.g., core appropriations, tuition, athletic receipts, gifts). But the state has no financial obligations to UM retirees or future retirees. Aside from what already exists in the trust fund, neither does the University of Missouri itself.

UM pension liabilities are huge. In an October 2022 graph entitled “Pension is the largest item in the balance sheet,” UM acknowledged the total pension liability of the Plan ($5.3 billion) is greater than the total combined capital assets (e.g., hospitals, stadiums, educational buildings, equipment, property) of the entire four-campus university ($3.7 billion). Moreover, that pension liability is increasing linearly with time (a near-perfect statistical correlation of 0.99) and with an average year-over-year growth rate (AAGR) of 4.50% (data source: latest UM Financial Report, p. 90). The Plan's liabilities are not only huge, but they are also growing. UM further comments that the unfunded portion of these liabilities is not only large but also "volatile.”

The unfunded portion of the pension liability is somewhere between 19% and 44% depending upon the “discount rate” assumptions you use to value the total expected future pension payments of $19 billion to retirees and beneficiaries.

Moreover, it was reported in February 2022 that the pension liability is competing with $1.8 billion in other university debt (e.g., NextGen and other bonds), a number that is three times what it was in 2005. This $1.8B is thought to be about 93% of the university’s overall “balance sheet debt capacity” if it wishes to maintain its current credit rating. The UM System admits that the models it uses to forecast debt repayment are based on low inflation assumptions.

With mounting debt, two threats for UM pensioners, and future pensioners are exacerbated. First, there is no legal requirement for UM to appropriately fund the Pension Trust Fund. Second, the University can terminate the entire retirement plan at any time, without cause, and without a guarantee that earned and vested benefits will be fully distributed to employees, retirees, and their beneficiaries. Those facts come as quite a surprise to plan members, few of whom have plodded through the legal morass of the UM Collected Rules and Regulations (CRR).

Funding the Pension Trust is, and always has been, a discretionary amount determined exclusively by the current members of the Board of Curators. From the CRRs:

"From time to time as necessary or desirable, in its sole discretion, the Board under the advice of the actuary under the Plan shall transfer monies to the Fund from state-appropriated or other public funds under the control of the Board."

Key words in this paragraph are "from time to time" (rather than annually) and at the Board's "sole discretion" (rather than mandated by any other rules, regulations, statutes, or actuarial obligations). To repeat an all‑important detail, unlike MOSERS, the State of Missouri does not directly provide any funds to the UM retirement plan.

In April 2022, the Board of Curators adopted “principles” that may trigger an analysis should funding of the trust fall below 75% of liabilities and thereby signal a potential disaster. However, it is not a mandate and does not require any subsequent Board action:

“To the extent this (or any other factors) cause the actuarily determined funded status of the Plan to fall below 75%, the Executive Vice President for Finance and Operations should develop formal recommendations for the Board Finance Committee to improve the funded status of the Plan, which should include a review of investment risk, required contributions and the management of the Plan’s liabilities.”

Notice that the paragraph describes what the university “should” do, not what it “shall” or “must” do. It is a suggestion.

Like funding to the plan, benefit payments from the plan also lack any assurances or guarantees in the CRRs. The Board of Curators has the unrestricted ability to abolish, at will, the retirement Plan for all retirees and active employees who are members of the Plan: "The Board by resolution may terminate its obligation under the Plan at any time.”

Moreover, the university is under no obligation to pay the fully earned benefits accrued under the Plan if it is terminated: “If the funds available … are determined by the actuary to be insufficient to provide the benefits, the Fund and benefits shall be apportioned among the various Members in proportion to the actuarial value of each employee's accrued credits, on an equitable basis as determined by the actuary.”

Alternatively stated, retirees, beneficiaries, and active employees will be given only their fair share of whatever remains in the Fund after it is terminated by the Board and all the administrators are paid. What remains in the Fund may be 90 cents on the dollar, or 10 cents on the dollar (or any other proportion).

Moreover, further clauses state that the “Fund shall be the sole source of all retirement income or other benefits provided under this Plan and in no circumstances shall any other funds of the University … be liable or responsible therefor.”

Because the state disavows any financial responsibility for UM’s retirement plan, this leaves plan members without recourse if the curators terminate the plan.

Can retirees sue for their fully earned benefits? That and more in the final installment.

Art Jago is Professor Emeritus of Management, Trulaske College of Business, at the University of Missouri. He is a former chair of the Department of Management, but now receives a university pension check each month after 23 years of service.

This article originally appeared on Columbia Daily Tribune: Pension trust fund benefits not guaranteed