Current Pension Topics
Retirement Allowance Pieces

By JOEL L. FRANK

Q.: I am a city cop (Tier 2) and expect to retire upon completion of my 20th year of service. A colleague told me that there are three parts to the retirement allowance. If this is so, would you please tell me what they are?

Mr. Frank is a fee-only Retirement Financial Planner. He can be reached by telephone at (732) 536-9472, or via e-mail at rollover@optonline.net

P.S.

A.: Part 1. A city-funded pension equal to 3/8 (37.5 percent) of your Final Average Salary (FAS).

Part 2. An additional city-funded pension (calculated as an annuity) based on the balance of your Increased-Take-Home-Pay (ITHP) account.

Part 3. An employee-funded annuity based on the balance of your Accumulated Deductions account.

Q.: I am a participant in the Variable B Annuity Fund of the Teachers' Retirement System (TRS) of the City of New York. A while back you reported that there is a class-action lawsuit against the TRS alleging that its seven-member Board of Trustees has continuously mismanaged the investments of the Variable B Fund. Would you please bring us up to date?

I.R.

A.: Diversify, diversify! We all have heard/read about how critically important it is to diversify your investments both inside and outside of a pre-tax account. If you do not diversify and suffer a very large loss, then you and only you suffer the consequences. But when a group of Trustees decides not to diversify and subsequently incurs a very large loss, then the many investors who relied on the Trustees suffer. This is what has happened to the tens of thousands of Teacher/investors who relied on the TRS Board of Trustees to diversify the assets of the Variable B Annuity Fund.

Prior to the start of the Variable B Annuity Fund, the TRS Variable Annuity Program offered only two investment choices: a Fixed Annuity Fund and a Variable Annuity Fund. The Variable Annuity Fund was and remains an all-equities portfolio. This fund is now referred to as the Variable A Annuity Fund. The legislation creating the Variable B Fund directed the Trustees to invest its assets in "fixed income and equity securities." The fund was launched on July 1, 1983 and its assets have never been invested pursuant to its legislative directive.

From the outset, the Trustees have invested Variable B assets in Guaranteed Investment Contracts, or GIC, issued by large insurance companies. With a GIC, the insurance company promises to pay a stated rate of interest at certain intervals and the principal amount when the GIC matures. Starting in 1991, the Trustees were no longer able to find GIC paying more than 8.25 percent, the guaranteed rate being credited to teachers' accounts in the Fixed Annuity Fund. The year 1991 should, therefore, have been their wake-up call to at long last obey their legislative directive (the law) and invest in "fixed income and equity securities." The Trustees did not wake up but slept through the piercing noise of the alarm clock and continued to purchase GICs at lower and lower interest rates. During the last 15 years, the Variable B Fund has returned 5.55 percent, while the Fixed Annuity Fund has returned 8.25 percent. The complaint was filed in State Supreme Court in February 1997. See: Nager vs. TRS, Index Number: 102377/97.

Notwithstanding the Trustees' legislative directive to invest the assets of Variable B in "fixed income and equity securities," it is unfathomable that they have never done so, especially in light of the fact that, in 1990, the Board of Trustees changed their 73-year-old policy of investing 100 percent of the assets of the Qualified Pension Plan (the Plan that the city contributes to) in fixed-income securities to one that includes equities. Today 30 percent of the assets of the Qualified Pension Plan is invested in fixed-income securities and 70 percent in equities. Why has the Board of Trustees ignored, with such arrogance, its legislative directive to invest in "fixed income and equity securities"?

Three of the seven-member Board of Trustees are United Federation of Teachers Trustees. The three have always voted as a bloc (so much for independent thinking) on resolutions placed before the board. While it takes a simple majority of four to carry a resolution, one of the four must be a UFT Trustee. This one-out-of-four rule is particularly important to Teachers, lest the four "public" Trustees pass resolutions hurtful to Teachers. The one-out-of-four rule gives the UFT a veto power over all TRS decisions.

Having said that, every resolution, since 1983, that reaffirmed the Trustees' policy to invest and reinvest the assets of Variable B solely in GIC was always voted for, without exception, by each one of the three UFT Trustees. Not one of the three UFT Trustees has ever shown his/her displeasure of continuously investing 100 percent of the assets of the Variable Annuity B Fund in a single type of fixed-income security, namely GIC, by simply voting against a resolution to reinvest in GIC. How could this happen?

The case is currently on appeal with the Appellate Division of the Supreme Court of the State of New York. The Court should reach its decision before the end of the year. As soon as that happens, I will report the decision (along with my analysis) to the readers of Current Pension Topics.