This document is intended to answer the questions most frequently
asked of ETF about the Wisconsin Retirement System (WRS) Core and
Variable annuity adjustments.
It is important to point out that ETF administers benefits the
same way for every WRS member. Each member’s WRS account is
based on benefit levels determined by law during employment, the
contributions the employee and employer have made for that employee,
the investment performance of the WRS, and actuarial factors. WRS
assets are managed and invested by the State of Wisconsin Investment
1. What are annuity adjustments?
Annuity adjustments are annual changes in the amount of a retiree’s
monthly pension payment (annuity) for the coming year. Shared
risk is a key design feature of the WRS. As such, retirement annuities
may be either increased or decreased (adjusted) based on WRS investment
returns. The adjustments are applied to annuities on May 1, after
year-end investment performance is finalized and an actuarial
analysis is completed.
Investment returns prior to 2008 generated many years of positive
Core annuity adjustments for retirees. Therefore, Core annuities
in general grew to amounts above retirees’ original guaranteed
amounts (“floor”) set at retirement. However, because
of the substantial market losses of 2008, ETF has had to apply
consecutive years of negative Core annuity adjustments, taking
back previously-granted Core annuity increases from individual
retirees not already at their Core floor.
2. Who determines the annuity adjustments?
The rates are recommended by the Department’s independent
consulting actuary and approved by the ETF
Board Chair and ETF Secretary. Each year, the actuary recommends
annuity adjustments after conducting a review, which takes into
account investment returns, the laws governing the WRS, and other
actuarial factors, such as mortality. The actuary's recommendations
are typically presented at the Board’s March meeting. Once
reviewed by the Board, ETF implements the changes to monthly annuity
payments. View this year's actuarial
3. How does an annuity adjustment differ
from a cost-of-living increase (COLA)?
The WRS does not provide guaranteed COLAs to retirees. Some
retirement systems automatically pay annual increases of a set
amount. However, many are beginning to revisit their COLA policies
because of funding problems caused by such guarantees, as they
tend to be unfunded liabilities.
After a WRS member retires, any annuity adjustments are based
primarily on the investment returns of the trust funds. Actuarial
factors, such as mortality rates also affect annuity adjustments.
Annuity adjustment rates are determined annually after the effective
rates of interest are credited to the annuity reserve (the fund
from which WRS annuities are paid).
Under state law, if after interest crediting there is more
money in the annuity reserve than will be needed to pay the annuity
reserve’s future benefit liabilities, an increase (in the
form of a positive adjustment) may be granted. However, if there
is less money than will be needed to pay the
future benefit liabilities, the annuity adjustment must be a decrease
to make up for the shortfall.
4. How does the five-year smoothing in
the Core Fund affect my annuity?
In accordance with state law, Core Fund investment performance
is smoothed over five years to mitigate the effects of market
volatility. Therefore, in some years – those with high investment
returns – the Core annuity adjustments may be more than
the State of Wisconsin Investment Board’s (SWIB) actual
investment returns for the year. However, in years with poor returns,
the adjustments may be lower than that year’s actual returns.
This smoothing process provides stability in post-retirement income
(the “highs” aren’t so high and the “lows"
aren’t so low) and creates more stable Core effective interest
rates and contribution rates for active employees.
This year’s Core annuity adjustment marks the fifth and
final year of annuity reductions based on the smoothing of market
losses in 2008. Core Fund assets experienced a $21 billion investment
decline in 2008. Without smoothing, Core annuities would
have been reduced by approximately 32% to 35% in 2009.
Instead, annuities that were not at the original guaranteed amounts
reduced 2.1% in 2009, 1.3% in 2010, 1.2% in 2011, and 7% in 2012.
We are hoping that Core annuity increases return in 2014, barring
another substantial downturn.
5. Why are the annuity adjustments –
both Core and Variable – always lower than the effective
rate of interest that applies to active employees?
Annuity adjustments will always be lower than
the effective rates because the adjustments are based
on the effective rates. Here are the steps in the rate-setting
a) SWIB announces calendar year investment returns
for the Core and Variable Trust Funds.
b) Using finalized SWIB returns, ETF calculates the
Core and Variable effective rates of interest (for active employees).
c) ETF calculates the Core and Variable annuity adjustments
(for retirees), using the effective rates as a starting point
for the calculations. The annuity adjustments are always
lower than the effective rates – approximately 5% to 8%
lower – because there is already a 5% earnings assumption
built into the initial benefit amount paid to retirees. In addition,
actuarial factors such as mortality, carryover, etc., are factors
in the adjustment calculation process.
The purpose of the WRS is to provide a lifetime benefit to its
annuitants. In order to fulfill the guarantee of a lifetime benefit
in a manner that is actuarially sound, a 5% return on investment
is needed. That 5% is needed to fulfill lifetime benefits for
retirees above and beyond what may have been paid by the employee
and the employer in WRS contributions during the employee's working
career. Any surplus to an investment return of 5%, which would
result in a 0.5% increase to existing Core annuities, is by state
law to be distributed equitably by the ETF Board among retirees.
6. Why won’t the projected negative
Core annuity adjustment affect all WRS retirees equally?
By law, Core annuities cannot be reduced to an amount below
the original, guaranteed amount (the “floor”) set
at retirement. Some retirees will receive a reduction at the lower
end of the range (or none at all) because their Core annuities
are already either near, or at the guaranteed Core floor set at
retirement, respectively. Others will experience a Core annuity
reduction at the higher end of the range because their Core annuities
have grown that much over time with dividends.
In general, members who retired on or before 2004 will receive
a Core annuity reduction, if they have any past increases to repeal,
and members who retired after 2004 will not receive
a reduction because they are already at their Core floor.
This is the last year in which the Core effective rate and Core
annuity adjustment reflect 2008 investment declines. The Core
Fund has exceeded its investment earnings goal the last four years.
Therefore, we anticipate Core annuity increases in 2014, barring
another substantial downturn.
7. Isn’t a WRS retirement benefit
guaranteed never to decrease by state law?
Wis. Stat. §40.19 provides that benefits accrued to an
employee under Chapter 40 of the Wisconsin Statutes, the chapter
governing the WRS, shall not be taken away by any subsequent legislative
act. But this provision does not relate to positive investment
increases that have been accrued by retirees since retirement.
The Wisconsin Supreme Court has noted that WRS annuitants have
a contractual right to have dividends distributed consistent with
Wis. Stat. §40.27(2) (see Wisconsin Retired Teachers Association
Inc. vs. Employee Trust Funds Board, 207 Wis.2d 1, 3, 558 N.W.2d
83 (1997)), the statute providing for Core annuity reserve surplus
distributions. Those surplus distributions do not become a part
of a retiree's base annuity, which is guaranteed. Rather, under
§ 40.27(2), the ETF Board revokes annuity increases above
a retiree’s guaranteed floor amount when necessary to preserve
the financial integrity of the Core annuity reserve.
8. Is there a way for ETF to offset a
projected negative Core annuity adjustment?
This year’s rate-setting process is the last to recognize
the losses from 2008. While the WRS is working as designed by
adjusting annuities based on both positive and negative investment
performance, ETF nevertheless re-examined the process to determine
what options, if any, may be available to avoid further reductions
or years of consecutive reductions. The results of this review
were presented at the September 20, 2012 retirement board meetings.
The primary concepts discussed included:
The Boards acknowledged the real pain some individual retirees
are experiencing, but concluded that any “fix” would
need to balance the interests of all WRS participants and would
require law changes that would not be implemented until after
the 2008 effects are felt. Accordingly, the only viable option
for the system as a whole was to continue to administer the WRS
as it was designed and get the losses from 2008 behind us.
For more information, see the Annuity
Adjustment Update Correspondence Memo from the September 20,
2012 retirement board meeting. The memo explains in detail the
laws governing the WRS and annuity adjustments. You may also find
the memo and other board materials in the Governing
Boards section of this website.
9. Does the WRS have a plan document that
would explain how negative annuity adjustments are made?
As a governmental plan, the Wisconsin Retirement System (WRS)
“plan document” is Chapter
40 of the Wisconsin Statutes and various chapters of the Wisconsin
Administrative Code. You may also find these documents on
the State of
Wisconsin Legislative Reference Bureau website.
10. How will my annuity be affected if I
elected to participate in the Variable Fund?
The key difference between the Core and Variable Funds is that
the investment returns of the Core Fund are smoothed (recognized)
over a five-year period, while Variable Fund investment returns
are fully recognized each year. Core annuity adjustments are applied
to the Core annuities of all WRS retirees because everyone participates
in that fund. For those who participate in the optional Variable
Fund, the Variable portion of their annuities is subject to the
Variable annuity adjustment.
Variable participants are exposed to a higher degree of risk
because of possible losses from unfavorable stock market performance,
in exchange for the possibility of greater long-run returns. It
is possible for the Variable Fund portion of your annuity to decrease
to an amount below the base amount you received at retirement
– there is no guaranteed “floor” for Variable
11. How much is my check going to change
In late April ETF will send you a personalized annuity mailer
statement. It will show exactly how much your monthly payment
will change for the coming year, beginning May 1.
Monitor this site for frequent updates to this document. You may
also call 1-877-533-5020 or send an e-mail.
We also recommend the following ETF resources: