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News

Press Release

For Immediate Release
February 15, 2002

Contact: Pam Henning, (608) 267-2929

Department of Employee Trust Funds Announces 2001 Fixed, Variable Effective Rates

MADISON -- Eric Stanchfield, Secretary of the Department of Employee Trust Funds (ETF), announced the Department has established the 2001 effective interest rates applied to the Fixed Retirement and Variable Retirement Investment Trusts. For 2001, the fixed effective rate is 8.4% and the variable effective rate is -9%.

The rates are applied to the retirement accounts of all 266,000 active employees covered under the Wisconsin Retirement System (WRS) and inactive WRS members who began employment before January 1, 1982. Inactive participants are those who have left public service but still keep their retirement accounts open. About 45% of the retirement systems 123,000 inactive members qualify for effective rate interest crediting. The rest by law receive a 5% increase.

The Department uses the effective rates to determine the monthly benefit (dividend) increases and variable adjustments paid to WRS retirees. Secretary Stanchfield is expected to announce retiree dividend increases in late February. They are applied to the May 1 annuity payment.

Stanchfield said the Department is pleased that members will see increases to their Fixed Fund balances, despite market performance over the past year. "There have been enough gains in the Fixed Trust over the past few years to smooth the recent volatility in the market," he said.

Last month the State of Wisconsin Investment Board (SWIB) reported final 2001 investment returns of 2.3% and 8.4% for the Fixed Trust Fund and Variable Trust Funds, respectively. SWIB returns influence the effective rates, which are set by ETF. However, ETF is able to grant a positive fixed effective rate due to the Transaction Amortization Account (TAA) payout of $1.98 billion in 2001 and because SWIB losses from 2000 and 2001 are spread over a five-year period

The negative return on the Variable Retirement Trust, which is invested exclusively in common stocks, means that the active and inactive employees who participate in the Variable will have that portion of their account value reduced by 9%.

Second year of TAA phase-out

Effective interest rates credited to WRS participant accounts do not mirror SWIB investment returns. That is because by law, only a percentage of the difference between the market value and purchase price of stocks and bonds in two accounting mechanisms used to "smooth" market volatility can be distributed to the trust fund accounts annually. The two mechanisms currently at work are the TAA and the newly created Market Recognition Account (MRA). 1999 Wisconsin Act 11 provided for a five-year elimination of the TAA when it created the MRA. This is the second year of the TAA phase-out; 20% of the TAA balance as valued at the end of the year for the next three years is being paid out, and investment gains and losses are credited instead to the new MRA.

Eventually, the MRA will be the sole accounting mechanism for smoothing fixed trust earnings. The change to the MRA will mean a faster recognition of gains and losses than occurs with the current TAA.

Summary and Additional Background Information

  • Prior to January 1, 2000 only active employees and inactive members with pre-1982 WRS start dates qualified for effective rate interest crediting. By law, all others received a 5% increase. Under 1999 Wisconsin Act 11, all actively employed members now receive effective rate interest crediting from the date of the law (January 1, 2000) forward.
  • The Variable Fund investment performance for calendar year 2001 as reported by SWIB was 8.4%. The difference in the Variable Fund interest credited to member accounts and the return reported by SWIB is due to accounting differences and a law that requires the Variable Fund performance credited to WRS member accounts be adjusted to a whole percentage point.
  • Participation in the Variable Trust had been closed to new entrants in April 1980, but was reopened by 1999 Wisconsin Act 11. Participating employees on or after January 1, 2001 have been able to elect to have future contributions placed in the Variable Trust.
  • Over the past 10 years, the average annual increase in the Variable Effective Rate has been 12.8%.
  • Over the past 10 years, the average annual increase in the Fixed Effective Rate has been 12.2%.