Secure Your Future
TRS investments vintage 2006: A fine and bountiful year
Feb 15, 2007 12:11 PM
We hope you have made plans to get the most enjoyment out of your well-deserved mid-winter recess next week. While you get your batteries recharged, take a few moments to think about a secure future.
As we said in the last issue, 2006 was a very good year in the investment world, and Teachers’ Retirement System members’ tax-deferred annuity investments showed it.
All of the figures for the pension fund are not in yet, but those that have been reported show very positive results. We will present the investment characteristics of this $35 billion fund in a future issue.
For the fourth year in a row, all types of stocks — domestic, international, large capitalization (cap), mid cap, small cap, growth, value and technology — had up years. Value stocks had higher returns than growth stock and international stocks out-performed domestic stocks.
Cash investments as represented by three-month Treasury bills benefited from interest-rate increases this year and had a return of 4.76 percent. A broad spectrum of investment-grade bonds earned 4.33 percent.
Annualized Investment Return | |||
| 1 yr | 5 yrs | 10 yrs | |
| Fixed | 8.25% | 8.25% | 8.25% |
| Variable A | 16.17 | 8.22 | 8.67 |
| Variable B | 3.93 | 3.76 | 4.80 |
| Russell 3000 | 15.72 | 7.17 | 8.64 |
| Inflation (CPI) | 2.58 | 2.71 | 2.46 |
All figures annualized through Dec. 31, 2006 | |||
The results for 2006 again show the importance of a broadly diversified portfolio. It is exceedingly difficult to predict which investment asset class will do best at any time, so the TRS, in its three portfolios, always diversifies over many appropriate asset classes. This has served the TRS well over the years, participating in market gains and mitigating losses when the various securities markets lose value.
We certainly cannot predict what will happen in the future and 2007 has started off with modest gains but has not shown any clear trends. But, whatever happens, the funds entrusted to the TRS to secure your future will be carefully managed with the advice and guidance of select investment managers and advisors. Because of the advantage of size in bargaining for fees charged to manage the funds, TRS fees are kept to a minimum, yielding higher returns.
Tier I/II members may invest their Annuity Savings Fund (ASF) and Increased Take-Home Pay (ITHP) accounts in the three portfolios, and members in all tiers who participate in the TDA program may invest in any of the three investment choices. It is unlikely that the TRS will reach its goal of offering new investment choices in 2007, but it does look like that will happen in 2008.
The total value of the TRS’ assets in all three programs as of Dec. 31 was about $50 billion. This makes the TRS one of the 30 largest pension funds in the U.S. The fund is invested under the direction of the Teachers’ Retirement Board, which, with the guidance of its investment consultants, retains a group of money managers who are associated with banks, insurance companies, mutual funds and other institutional money-management firms. If you would like a list of these firms write to us at the UFT.
Fixed-Income Fund
This fund is invested commingled with the pension fund, which is financed by New York City and member contributions to provide our defined benefit pension — the Qualified Pension Plan (QPP). The fund has assets worth about $35 billion as of Dec. 31.
The assets are allocated into several different broadly diversified asset classes that we will discuss in a future issue.
The fund earned 15.05 percent in 2006 and an annualized rate of 8.58 percent over the last 10 years. Members who invested in the Fixed Fund trade off the volatility of this investment for a guaranteed crediting rate of 8.25 percent annually.
Because of the poor investment returns in 2000, 2001 and 2002, the city has raised its contributions to the pension fund in order to keep our benefits soundly funded. The UFT carefully monitors the funding needed to make sure funds are available to pay all of our benefits. You can be very confident that the money needed to pay for your hard-earned, well-deserved pensions will be there at retirement.
As you are aware by reading the papers, there is a call by some to create a new pension Tier V with reduced benefits for new members. There is even a call by fiscal conservatives in right-wing think tanks to close the defined-benefit (DB) plan for new members and create a defined contribution (DC) savings plan in its place. The UFT will monitor this carefully and mount a most vigorous campaign to prevent it.
This move to DC plans is a nationwide threat already enacted in Alaska and under consideration in California (again), Michigan and Montana. There is a significant threat of undermining retirement benefits in Colorado, Illinois, Indiana, Mississippi, New Jersey (and that’s close), New Mexico, Oregon and Rhode Island. In many other states there is a potential threat caused by legislative uncertainty or funding shortfalls. We will keep watch on this disturbing trend.
Some members of the UFT — paraprofessionals and part-time employees — are not automatically mandated into retirement system membership. They may join a retirement system voluntarily and we urge them to do so ASAP to protect their rights to the current benefits. Part-time employees should join the Board of Education Retirement System (BERS) and paras should join the TRS.
In 1968, the UFT obtained for TRS members the right to capture the entire return of the markets after expenses on TRS investments. Thus, the variable annuity was born. This, along with the TDA, which began in February 1970, gave TRS retirees an opportunity to enjoy an even more financially secure retirement than was provided by the QPP alone.
In order to get the right to earn the entire return on their investments, members had to give up the guarantee that their principal would never fall and that there would always be growth. Those who select a variable program must accept the volatility of the investment markets.
Currently, the TRS offers two variable programs. As we noted, work is being done at the TRS that will lead to additional variable programs in the future.
Variable A
This fund has evolved into a broadly diversified equity fund designed to capture the return of the broad equity market over the long term. The fund emphasizes the ownership of stock in large-, mid- and small-cap companies as well as the stock of non-U.S. companies. A portion of the fund is allocated to defensive strategies in order to control the short-term volatility of equities.
While the primary goal is growth of principal, a secondary goal is preservation of capital through careful attention to risk, wide diversification and defensive strategies.
On Dec. 31, the market value was about $14.9 billion, about 80 percent in domestic stocks, 15 percent in international stocks, and about 6 percent in fixed-income securities including cash. The numbers do not add up to 100 because of rounding.
Variable A had a 16.17 percent return in 2006. This was higher than the Russell 3000 index return of 15.72 percent.
Consistent with its long-held position that it is very difficult to outperform the entire stock market, the TRS has invested most of Variable A in index funds designed to match the returns of the entire stock market. Most of the funds are passively invested in either pure or enhanced index funds. The rest are actively managed in an effort to get higher returns than the market.
Variable B
This program was started in 1983 as a vehicle for members who preferred to invest for current interest rates (which were very high in the early 1980s) and who thought the return on these shorter-term fixed-income investments would be greater than the return available in the TRS’ fixed-income program, which was then 8 percent.
The primary goals of Variable B are to preserve capital and to earn current interest rates. The fund does not invest in any volatile securities. Its assets are well-diversified among stable fixed-income investments such as Guaranteed Investment Contracts (GICs) issued by highly rated insurance companies, synthetic GICs backed by publicly traded short-term fixed-income instruments (guaranteed by highly rated insurers) and cash equivalents for liquidity.
In 2006, Variable B earned 3.93 percent. This was an increase over 2005 due to an increase in short-term interest rates in 2006. Members had about $750 million invested in this program.
For some time, Variable B has earned less than the guaranteed rate of the fixed program. This is due to the general low-interest environment of the current economy. Because of the low interest rates available on stable fixed-income investments many members have switched from Variable B to one of the other investment programs.
TDA change of investment elections
TDA in-service and TDA deferred-status members may change their investment elections quarterly. To make a change for the second quarter of 2007, beginning April 1, the TRS must receive your application by March 1. You may make the change on the TRS Web site at www.trs.nyc.ny.us (if you have set up full access) or by getting a change of investment form from the TRS or the UFT.
Reminder
If you’re a new TRS member, have you filed your enrollment application and related paper work? Does the TRS know who your beneficiaries are? If not, take action immediately by filing the applicable forms.
TRS holiday schedule
TRS offices will be closed on Monday, Feb. 19, in observance of Presidents’ Day. The offices will be open the rest of that week.
“Secure your future” is compiled and written by Mel Aaronson, Sandra March and Mona Romain, teacher-members of the NYC Teachers’ Retirement Board. For further information on items discussed, call your UFT borough office or the TRS. BRONX: 1-718-379-6200; BROOKLYN: 1-718-852-4900; MANHATTAN: 1-212-598-6800; QUEENS: 1-718-275-4400; STATEN ISLAND: 1-718-605-1400; Teachers’ Retirement System: 1-888-8NYC-TRS (692-877).
