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Department of Employee Trust Funds
March 9, 2007

Why Isn't the Core Annuity Dividend Larger?

Some members are wondering why this year's Core Fund annuity increase isn't larger, given that the State of Wisconsin Investment Board reported 2006 Core Fund investment earnings of 15.8%. The answer is complicated, and is based on two Wisconsin Retirement System (WRS) funding requirements contained in state law and the improved life expectancy of retirees.

  • To limit wide swings in dividend payments, Core Fund gains and losses must be spread ("smoothed") over a five-year period. Therefore, this year's Core rates reflect investment results from 2002-2006. While there were investment gains carried over from 2003 onward (a total of $2.9 billion), the calculation process also includes a nearly $1.8 billion loss carried over from 2002, the last year of the 2000 to 2002 bear market. In addition, as a result of the smoothing process, 80% of 2006's $4.9 billion in investment gains have been deferred and will be recognized from 2007-2010. The following table illustrates the past 5-year history of Core Fund rates.

  • 5-Year History of Core Fund Rates

    YearSWIB's Actual Investment ReturnsWRS Core Effective RateWRS Core Annuity Rate
    2002- 8.8% (loss)5.0%0.0%

  • By law, WRS annuities are funded based on the assumption that the trust fund will earn 5% each year. Therefore, only investment returns above and beyond the assumed 5% earnings are available to provide increases.

  • Changes in WRS annuitant mortality rates also affect annuity increases. Core and Variable annuity rates were reduced this year due to the increased life expectancy of WRS annuitant members. More retirees are living longer, which is a very good thing for our participants. However, it also means that WRS annuities are now anticipated to be paid for a longer period than originally expected. Since it will cost more than originally expected just to pay annuities already in force, the increased longevity results in slightly smaller annuity increases. Last December, the ETF Board approved recommendations by the Department's consulting actuary to make adjustments to mortality assumptions and the reserves for mortality improvement.
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