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Department of Employee Trust Funds
March 10, 2008
Why won’t there be an increase in Variable
annuities this year, since the Variable fund was credited with 6%
interest for 2007?
To understand why there is no variable annuity increase this year
requires a brief explanation of how Wisconsin Retirement System
(WRS) annuities are funded:
When WRS participants retire, the Department calculates how much
money it will cost to pay their annuities for their lifetimes and
transfers that amount to the “annuity reserve,” the
fund from which all annuities are paid. By law, that amount is calculated
based on the assumption that the trust fund will earn 5% interest
every year. This means that the fund must earn 5% each year just
to “break even”. Only investment earnings that exceed
the 5% assumed annual earnings are available for annuity increases
(if the fund earns less than the assumed 5%, that shortfall must
be “made up” in the form of an annuity decrease). Consequently,
the Core and Variable annuity adjustments will generally be at least
5% less than the Core and Variable effective rates applied to the
retirement accounts of employed Wisconsin Retirement System (WRS)
members and eligible inactive members.
There are other factors that go into the Variable annuity adjustment
calculation:
- Changes in WRS participant mortality rates (life expectancy).
Annuitants' life expectancies are increasing, and while this is
a very good thing, it also means that their annuities will be
paid for a longer period than was we originally assumed. Since
more money will be needed to pay the annuities for longer than
expected, it results in less money from investment earnings being
available to provide annuity increases.
- By law, a Variable annuity adjustment can only be granted if
the adjustment will be at least 2% (increase or decrease). Since
the Variable portion of the annuity reserve was credited with
6% interest for 2007, after the 5% assumed interest was deducted
there were not sufficient funds to grant at least a 2% Variable
annuity increase. However, any surplus funds are carried forward,
and will be included when calculating the next year’s Variable
annuity adjustment.
To learn more about how annuity dividends are calculated and how
Variable participation affects WRS benefits, review these online
recordings, found in our video library:
Annual
Retirement Annuity Adjustments
WRS
Trust Funds: Core and Variable
Other helpful resources:
Brochure: How Participation
in the Variable Trust Fund Affects Your WRS Benefits, (ET-4930).
ETF form: Canceling Variable
Participation (ET-2313). The instructions contain detailed information
on all of the cancellation options.
Historical chart: To review the Core and Variable Fund investment
returns, effective rates and annuity dividends and adjustments for
the past 20 years, go to http://etf.wi.gov/retirees/dividends.htm.*
*Future rates and dividends are not guaranteed.
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