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News

Press Release

For Immediate Release
February 26, 2003

Contact: Pam Henning, (608) 267-2929


Department of Employee Trust Funds Announces Effective Interest Rates and Annuity Adjustments

MADISON -- Eric Stanchfield, Secretary of the Department of Employee Trust Funds (ETF), announced the 2002 fixed and variable effective interest rates for active Wisconsin Retirement System (WRS) members and eligible inactive members. The fixed effective rate is 5% and the variable effective rate is -23% .

The Department also announced the annual post-retirement adjustments, which affect approximately 116,000 WRS annuitants. The fixed annuity adjustment is 0% (no increase) and the variable annuity adjustment is -27%.

"It's been a virtually unprecedented three years," Stanchfield said, referring to the extended down market for investments. "We are relieved that for this year, retirees will not see a reduction in the fixed portion of their annuities and that working employees will earn 5% on their fixed account balances. There were enough unrecognized Fixed Trust investment gains from prior years to 'smooth' the volatility we've experienced in the markets."

The fixed effective rate affects the retirement accounts of the system's 269,000 active employees and the 54,000 inactive members who began employment before January 1, 1982. For those that participate in the optional variable trust fund, the negative variable effective rate means that they will have that portion of their retirement account values reduced by 23%. Approximately 65,000 active members and 7,500 inactive members participate in the variable, department records show.

For retirees, the 0% fixed annuity adjustment means that, for the first time in WRS history, they will not see a benefit increase (dividend) in the fixed portion of their monthly paychecks. For variable annuitants, the negative variable adjustment means that they will see a reduction of 27% in that portion of their monthly payments. Department records indicate this will mean an average loss of about $300 a month for variable participants.

SWIB returns influence rates set by ETF

Investment returns of the State of Wisconsin Investment Board (SWIB) influence the effective rates and annuity adjustments, which are computed and set by ETF. In January, SWIB reported final 2002 investment returns of -8.8% and -21.9% for the fixed and variable trust funds, respectively.

Despite the negative SWIB returns, "paper" investment gains from previous years* helped keep this year's fixed effective rate (for actives) positive and allowed a 0% fixed annuity dividend (instead of a negative dividend). But the computation process itself actually resulted in a -.3% fixed annuity dividend. However, under current Board ETF Board policy, instead of reducing retirees' fixed annuities by -.3%, the negative figure will be carried over into next year's computation process.

"No one can predict what the markets will do in 2003," said Stanchfield, "but it's clear we need substantial, positive returns in order to avoid a roll-back of some portion of past fixed dividends next year."

Additional Background information:

  • The Fixed Fund (or balanced fund) is the larger of the two trust funds of the WRS. It has diversified holdings in domestic and international stocks, bonds, loans, real estate and private equity. According to SWIB, the market value of the Fixed Fund on December 31, 2002 was $46.3 billion.
  • The Variable Fund was created to establish an option that would enable members to have a portion of their benefit based on the performance of a broadly diversified stock portfolio. It is primarily invested in common stocks with annuities that fully reflect the gains and losses of the investments. While due care and prudence are exercised in the investment of the Trust, those who have elected this option risk the possibility that unfavorable stock market performance could result in losses. According to SWIB, the market value of the Variable Fund on December 31, 2002 was $4.7 billion.
  • Over the past ten years, the average annual fixed annuity dividend has been 6.1% and the average annual variable annuity adjustment has been 3.9%.
  • Over the past ten years, the average annual increase in the fixed effective rate has been 11.7% and the average annual increase in the variable effective rate has been 9.4%.
  • Department records indicate the average fixed annuity is currently $1,533 a month; $18,400 a year. The average variable annuity is about $1,000 a month.
  • The provisions of 1999 Wisconsin Act 11 do not affect the variable effective rate or variable adjustment paid to retirees

*This year, ETF is able to pass through a positive fixed effective rate because of the five-year phase out of the "paper" investment gains in the Transaction Amortization Account (TAA), as authorized under 1999 Wisconsin Act 11.

 

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