Wednesday, July 05, 2006

The Other Side of the Coin

Last week PERS started sending out 2005 statements to active and inactive members. Since those have gone out, I've seen a real increase in my email from Tier 1 members with variable accounts. The question is exactly the same each time. How come the regular Tier 1 earnings were 13+% (only 8% actually paid on Tier 1 Regular accounts), while the variable earnings were only 8.39%? I'm a bit perplexed why PERS has been unable to answer this question for members inquiring. The answer is simple. It is the other side of the coin of aggressive investing. The Tier 1 regular account is invested more conservatively than the Variable account, which is more aggressively managed. In really good times, the variable *should* earn more than the regular and historically this has been true. But, last year was not a "typical" year and the more conservative investment style did better than the more aggressive style. Consequently, the variable actually earned less than the regular. There isn't anything sinister happening here; PERS isn't creaming off variable earnings to stick into reserves. The variable earns what it earns and in 2005 it earned less than the regular. End of story.

Note added at 7 p.m. Not so fast is this the end of the story. Apparently the problem is a bit more complex and requires a clear statement from PERS about what is going on. According to PERS' website, the 2005 financials include the December earnings rate for the variable at 13+%. Since the December earnings are typically within a fraction of a percent of the earnings paid out after end of year accounting, it is somewhat disconcerting to see a 5% difference between the stated December penultimate earnings figure and the actual figure of 8.39%. While I'm certain there is an explanation for this huge divergence, PERS has some big explaining to do. My note above still stands - the variable earnings are supposed to be actual earnings on funds more aggressively invested than the regular Tier 1 fixed account. This year something doesn't add up. Hopefully my contacts at PERS can provide some guidance on this disparity.

Note added even later: My bad. The original statement stands. PERS shows at its variable listing that the 2005 December earnings are indeed 8.29%, not the 13+ I reported earning. I apologize for the confusion. The variable really *did* earn less in 2005 than the regular for the reasons noted above.

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