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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:

  1. 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.
  2. 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 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: Review the Core and Variable Fund investment returns, effective rates and annuity dividends and adjustments for the past 20 years.*

*Future rates and dividends are not guaranteed.

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