Secure Your Future
What goes up must come down — and vice-versa
Mar 29, 2007 1:24 PM
A little blip in a tiny stock market in China, which most people in the world can’t invest in, and some words, probably misunderstood, by a former chairman of the Federal Reserve Bank caused a wide dip in most stock markets in the world in late February. How does this affect our pensions and tax-deferred annuities?
The stock market is volatile and goes up and down. No one, except for those people buying shares or selling short, likes to see the market go down. The late February Chinese stock market loss reverberated around the world. How does this affect our members? Probably not much.
Pension fund
The defined benefit (guaranteed) pension we all work so hard for is very soundly invested. It is a well-diversified portfolio of equities (stocks and similar investments) and fixed income securities. As of Dec. 31, 2006, the total portfolio had $35.9 billion under management. Of that amount, $25.8 billion (72 percent) was invested in equity securities as follows:
- $17.2 billion (48 percent) in domestic (U.S.) stocks;
- $5.9 billion (16 percent) in international, developed country stocks;
- $1.8 billion (5 percent) in REITs (Real Estate Investment Trusts);
- $0.6 billion in private equity; and
- $0.3 billion in private real estate.
Another $10.1 billion (28 percent of total funds) was invested in fixed-income securities:
- $6.4 billion in investment grade bonds (such as government, mortgage, corporate and Yankee bonds);
- $1.2 billion in TIPS (Treasury Inflation Protected Securities);
- $1.9 billion in Enhanced Yield (below investment grade) bonds; and
- $0.6 billion in targeted funds and cash.
The defined benefit (DB) plan is guaranteed by the Constitution of the State of New York. The city regularly contributes to this plan at the rate required by an actuary to keep the plan soundly funded. The UFT and the teacher members of the Retirement Board carefully monitor the funding. Stock market volatility — or anything that happens in the short run — does not affect our pensions.
The volatility of the security markets may have an effect on the value of the money that members contribute to their own Teachers’ Retirement System accounts. As you know, the TRS offers three choices of investments: Fixed Annuity, Variable Annuity A and Variable Annuity B.
Fixed Annuity
Members who invest in the fixed-dollar account get a guaranteed rate of return of 8.25 percent per annum. This rate is guaranteed until June 30, 2009, and then will be reviewed by the state Legislature. Even after that date, the Legislature cannot set the fixed rate lower than 7 percent per annum because that minimum is guaranteed by the New York State constitution.
Stock market volatility has no effect on returns in the fixed-dollar fund, which is invested commingled with the pension fund.
Variable Annuity A
Variable A is a broadly diversified stock fund aimed at providing growth of capital with some protection against drastic stock losses. Investments in the stock market historically have had the greatest growth over a market cycle, but also the greatest volatility, and therefore the greatest chance of a loss of funds.
In a down market, the lower unit values enable you to buy more shares for your money. Any loss you may appear to have in a down market is only a paper loss — unless you decide to remove funds from your account or decide to change from Variable Annuity A to one of the other investment choices. If you are retired and collect a benefit, which is partially based on Variable Annuity A, your benefit will be reduced when the stock market goes down. But, as we noted above, the fixed part of your retirement allowance, which is generally the larger portion of your pension, is guaranteed.
If the stock market rebounds, Variable Annuity A funds will increase in value. In the past, the market has always recovered from downturns, but there is no guarantee that future performance will repeat history.
A member’s Variable A account balance will be affected by the volatility of the stock market, going down when the stock market goes down and up when the stock market goes up.
Variable Annuity B
Members who invest in the Variable Annuity B program are not affected by the stock market. Variable Annuity B funds are mostly invested in what are known as stable fixed-income instruments, similar to bank certificates of deposit. These investments are not volatile but reflect current interest rates, which as you know are low at this time.
No one can predict the future by even one second so we cannot offer any specific advice. Investment experts tell us that a well-diversified portfolio of stocks and fixed-income investments is an appropriate method for members to invest their retirement funds.
Those in-service members and retirees whose membership date is prior to July 26, 1976, may change the investment elections in the Qualified Pension Plan in April. Tax-deferred annuity participants may change their investment elections in May. Investment elections made at those times will commence in July.
TRS Membership
There are approximately 110,000 in-service members of TRS. More than 103,500 have starting membership dates after July 26, 1976.
The average age of TRS members is 36. Fewer than 2,000 are employed by the City University of New York, and a handful are employed by charter schools who have opted in to TRS to provide their employee retirement benefits. About 108,000 are employed by the Department of Education. Of those, more than 103,000 are UFT titles including some 78,900 teachers, 15,800 paraprofessionals and 8,800 secretaries, guidance counselors, laboratory technicians and assistants and others.
All of us are earning a defined benefit pension and future Social Security payments and we all will be covered by a substantial health insurance and Welfare Fund program. More than 70 percent of us are participating in a supplementary retirement program (the TDA). We have a bright future to look forward to.
Bravo to nurses
Congratulations to our sisters and brothers at Lutheran Medical Center on the successful culmination of your contract negotiations. You were so smart to make the issue of your Defined Benefit pension plan a paramount issue.
You showed why all American working people should be unionized. If that were true, the retirement security of all Americans would be enhanced. Between your DB plan, Social Security, an employer-provided health plan in retirement, and any contributions you are able to make in your supplemental retirement savings plan, you will be able to enjoy a financially secure retirement.
Congratulations to Special Representative Anne Goldman, Chapter Chair Renee Greston-Setteducato and all Lutheran Medical Center nurses.
“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.
