Harvard Hints at Re-evaluating Benefits Offerings

November 7, 2012 (PLANSPONSOR.com) – The costs of Harvard University’s employee benefits offerings are growing at “unsustainable rates,” according to the university’s financial report.

Total operating expenses increased 3% to $4 billion in fiscal year 2012, the main driver being compensation expense (salaries, wages and benefits), representing approximately 50% of the total operating expense.

“Universities tend to be generous with their employee benefit offerings, and Harvard is no exception,” the report said. “Yet with those costs continuing to increase at unsustainable rates, Harvard—like its peers and indeed like most other businesses—cannot simply continue with the status quo. The University is committed to offering fair and competitive compensation to all its employees, but ultimately must balance our responsibilities to the workforce with our need to pursue the University’s broader objectives.”

Employee benefits expense (before a one-time adjustment) increased 6%, primarily due to contributions to employee retirement plans, as well as increased enrollment and medical costs related to employee health benefit plans. In addition, there was an increase in defined benefit pension plan expenses resulting from changes in actuarial assumptions used to calculate these costs. During fiscal 2012, Harvard booked a one-time $14 million reduction in current year post-retirement health expense, due primarily to updating the demographic assumptions used to determine this expense. After accounting for this one-time adjustment, employee benefits expense grew 3%, or $15 million, to $476 million in fiscal 2012.

Harvard has retirement plans covering substantially all employees. All eligible faculty members, staff and hourly employees are covered by retirement programs that include a defined benefit component, a defined contribution component, or a combination of the two.

In accordance with the Employee Retirement Income Security Act (ERISA) requirements, Harvard established a trust to hold plan assets for its defined benefit pension plans. The fair value of the trust’s assets was $755.4 million and $746.9 million as of June 30, 2012, and 2011, respectively. During fiscal year 2012, Harvard used $36.9 million of internally designated funds for a discretionary defined benefit pension plan contribution. It recorded expenses for its defined contribution plans of $110.3 million and $104.5 million for fiscal 2012 and 2011, respectively. Gross benefits paid for pensions were $41.0 million and $41.3 million as of June 30, 2012, and 2011, respectively.

As of June 30, Harvard had internally designated and invested $339 million to fund the post-retirement health benefit accrued liability of $901.5 million. As of June 30, 2011, Harvard had internally designated and invested $311.9 million to fund an accrued liability of $782.2 million.

The accumulated benefit obligation associated with pension benefits was $791.5 million and $659.9 million at June 30, 2012, and 2011, respectively. When measured on an Internal Revenue Service (IRS) funding basis, which informs Harvard’s required cash contribution amount, the plan was overfunded at January 1, 2012.

The full report is available here.