Secure Your Future

Annual TRS investment review: The ups and downs of 2007

Feb 28, 2008 3:25 PM

2007 was a very tough year in the financial markets:

• Stocks were up for the fifth year in a row.
• International stocks did better than domestic stocks.
• Treasury bonds did very well.
• High yield bonds did poorly as did corporate bonds.
• Cash did better than long-term fixed-income bonds except for treasuries.
• Oil prices nearly doubled as the U.S. dollar lost value.
• Financial company stocks did poorly while sub-prime mortgages had great losses.

Having a broadly diversified portfolio was beneficial.

With all of this, how did Teachers’ Retirement System investments do?

Pension Fund/Fixed Dollar Fund

This fund is the repository for the money invested to pay our pensions and the money invested by members who participate in the fixed-investment program for their Qualified Pension Plan or tax-deferred annuity. As of Dec. 31, 2007, the fund had assets worth about $38 billion.

These assets are allocated in several different, broadly diversified asset classes such as domestic and international stock, bonds, real estate and private equity. Members who invest in this fund get a guaranteed rate of return of 8.25 percent per year.

Variable Annuity

In 1968, the UFT obtained for TRS members the right to capture the entire return of the markets after expenses on their 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 have noted in previous columns, the TRS is working on additional variable programs that will be available to members in the near future. Watch this column for more information.

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, 2007, the market value was about $14.6 billion of which about 80 percent was 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 5.55 percent return in 2007. This was higher than the Russell 3000 index return of 5.14 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 2007, Variable B earned 4.28 percent. Members had about $450 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.

Are you retiring in 2008?

Have you called the UFT at 1-212-598-6866 to arrange for a final pension consultation?

Have you decided on whether to take a terminal leave or take termination pay?

Have you thought about taking maximum pension or a pension option?

Have you thought about removing a lump sum from the QPP? Have you thought about where to invest any lump sum you remove?

Have you thought about what to do with your TDA account? Defer? Annuitize? Roll over?

All the above and more will be discussed at your final consultation.

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.

“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), www.trs.nyc.ny.us.