Teachers' pension funds beat the indexes on rate of return
You don't have to be a student of high finance to know that when it comes to retirement, many teachers have a good thing going. The rate of return on one of the largest pension funds in this country exceeded the performance of Standard & Poor's index last year and for the first nine months of 1983.
The combined assets of Teachers Insurance and Annuity Association - College Retirement Equities Fund are expected to total approximately $30 billion by year-end, up from $25 billion at the end of 1982.
TIAA's investments are headed by Walter G. Ehlers, executive vice-president, and CREF's investment operations are managed by James S. Martin, executive vice-president.
TIAA-CREF's portfolio is highly diversified. It contains a broad mix of fixed-dollar instruments and common stocks spread throughout a range of US and foreign companies and industries.
In its investment strategy, TIAA-CREF, its managers emphasize, takes the long view. ''We view the long-term nature of our assets and take our participation in them seriously,'' said CREF's Mr. Martin in an interview in TIAA-CREF's Manhattan headquarters.
''We're not in a quarterly performance game. We have a very patient clientele , and we're not under pressure to produce short-term performance,'' continued Mr. Martin, who joined CREF in 1974, having previously worked for Chase Manhattan's Chase Investor Management Corporation.
TIAA premiums are invested in direct loans to business and industry, commercial and industrial mortgages, publicly traded bonds, and income-producing real estate. Since 1960 its net rate of return on total invested assets has been higher than the average net rate earned by all US life insurance companies.
CREF, founded by TIAA in 1952 as the nation's first variable annuity fund, invests participants' annuity premiums in common stocks. The fund's assets, expected to total $14 billion by year-end, currently are invested in stocks of more than 1,800 companies listed on domestic and foreign stock exchanges.
Subject to the provisons of their employing institutions, TIAA-CREF retirement plan participants may allocate their premiums (including the employer's contribution) between TIAA and CREF in any proportion, including full allocation to either.
The 50/50 allocation ratio continues to be the most popular one among TIAA-CREF's 800,000 participants, who are mainly faculty and staff members at the university level.
The purpose of the combined program is to provide retirement income that is more responsive to economic change than a fixed pension benefit alone and less volatile than a common stock variable annuity alone.
One of the factors that can affect the course of common stock prices are interest rates and whether they will increase, hurting stock prices. How does Mr. Martin view prospects for interest rates over the short term?
''We pretty much know nothing about the short term'' outlook, he responded. Regarding the outlook six months and beyond, he said, ''We can expect the structure (for rates) to be lower, and substantially lower if you're looking three or four years from now.''
Further, Mr. Martin said that he expects the inflation rate, now running at 3 to 5 percent, ''will get somewhat higher as the economy expands.'' He added, however, that ''it's not going to rise to the levels it did in the last expansion. Six percent still looks like a good number for a cyclical high, and it certainly won't be double digit.''
CREF's variable annuity income changes each year on May 1, reflecting primarily the investment experience of the fund's common stock holdings. The fund's two largest current holdings are International Business Machines and American Telephone & Telegraph. Next in size are Schlumberger, General Motors, Smith Kline Beckman, Citicorp, Mobil, Aetna, and Texaco. The last three yearly changes in CREF annuity checks have raised CREF retirement income by a net of 62 percent over this period.
On the fixed income side, TIAA is currently crediting a 12.25 percent dividend rate, or two or three times the current inflation rate, on all premiums being paid in through February 1984. And, chiefly because of formerly favorable investment earnings, ''TIAA annuitants who retired 10 or 15 years ago are receiving 25 percent to 40 percent more today than they started out with, from annuities they thought would be 'fixed dollar,' '' notes TIAA's Mr. Ehlers.
The primary goal of the fund is the economic health of its participants at more than 3,700 colleges and universities. ''In our investment strategies and objectives,'' said Mr. Ehlers, ''we seek to achieve the highest possible returns within reasonable levels of risk, on a consistent basis over long time spans. This is inherent in building lifelong retirement incomes for our participants.''
This doesn't appear to be an idle claim. In 1982, the compound annual net total investment return for CREF was 22.1 percent, or better than the 21.2 percent for the equivalent Standard & Poor's 500 index. For the first nine months of this year, CREF's net rate of total investment was 24.3 percent, compared with 21.9 percent for the Standard & Poor's equivalent index.