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From the Executive Secretary
Is Your Retirement Safe?
The Retirement System has received a number of calls in the last few weeks from concerned members wanting to know if their retirement is safe. The answer is YES.
In the 2005 Summer issue of Trends, we wrote a column on this same topic. The answer was the same then as now. Retirement benefits are being paid to retirees and will be paid to those of us who retire in the future. Defined benefit plans, like Oklahoma Teachers', are designed to cushion the ups and downs of financial markets.
TRS is a defined benefit plan that pays a lifetime monthly retirement benefit. The amount you receive is based upon a preset formula. Benefits are determined by the member's years of service and salary average, NOT by the balance of a savings account at or after retirement. Recent financial turmoil will not impact the Retirement System's ability to pay benefits. Benefits TRS members receive are the same, whether investment markets go up or down.
We have experienced losses during this last year just like almost every pension plan. Most of our losses so far are paper losses as the market value of stocks we own have fallen. In most cases, the company is worth more than the current selling price of the company's stock and we expect the price to recover as the national economy improves.
We do experience actual losses due to the failure of bankrupt companies or selling stocks that have decreased in value. But, the main goal of the System's investment strategy is protection of assets by proper diversification of total assets. This diversification has served us well in the past and will continue to do so in the future. For example, TRS has a potential loss of $42 million in Lehman Brothers bonds. Since the investments are bonds, instead of stock, we don't expect a total loss. But if we did lose the full $42 million the loss would represent less than 1/2 of 1% of the total portfolio. Put in a different way, for every $1,000 a member might have invested in TRS, the loss from Lehman Brothers would be $4.94.
There are no 100% guarantees, but the state of Oklahoma is obligated to pay benefits to members of the Teachers' Retirement System. Oklahoma Supreme Court opinions do not guarantee an absolute benefit, but the Court has affirmed that benefits earned by educators and state employees are obligations of the state, and it is the duty of the state to make every effort to provide for these benefits.
We've been through this before! In 2001 and 2002, our investment returns were negative and then recovered when investment returns in 2004, 2005, 2006 and 2007 exceeded our annual goal of an 8% return on investments. Even with a 7.1% loss for the year ending June 30, 2008, we have averaged 9.97% return for the last five years. We are down to 7.04% for the last ten years due to negative returns in 2001, 2002 and 2008, but have averaged 9.61% for 15 years and above 10% for 20 years.
Overall, the Retirement System is still poorly funded when total assets are compared to total liabilities. We have discussed this many times in this column. It is due not to the System's investment returns, but to the lack of employer contributions by the State. In recent years, the State has taken steps to catch up on the lack of employer contributions during the past 40 years by increasing revenues TRS receives from sales and income tax collections and the employer contribution rate paid by local school districts. It is critical that these revenue sources be maintained and continue to grow.
The TRS staff hope you have a great 2008-09 school year.
James R. Wilbanks