Pension Buyouts Offer Cash at a High CostA handful of private companies are targeting pension recipients with a controversial product referred to as a "pension buyout" or "pension advance," which offers a lump-sum advance in exchange for pension benefit payments.

How It WorksFederal and state law prohibits pension benefits from being assigned to anyone other than the employee or beneficiary entitled to the benefit. To circumvent these laws, pension buyout companies typically establish the following arrangement:

Additionally, given that pension benefits cannot be assigned—and to mitigate any financial loss to the company if the pension recipient dies prematurely—a pension buyout company typically requires the pension recipient to purchase a life insurance policy equal to the amount of the advance and elect the company as the beneficiary. While the life insurance policy protects the company, no protection is extended to the pension recipient for procuring this policy.

High Interest RatesThe rate of interest paid by the pension recipient on these buyout arrange-ments is high when measured against interest rates on traditional consumer loans or credit cards. For example, in August 2011, several media outlets reported the story of a retired Navy doctor who was deep in debt and signed away 95 months of his pension payments, worth about $243,000, in exchange for $92,000 in cash. This arrangement equated to an annual interest rate of approximately 30 percent.

S e m i A n n u A l n e w S l e t t e r f o r C a l S t r S b e n e f i t r e C i p i e n t S

I N S I D E2 Pensions Improve California's

Public Education System

4 Protecting Your Purchasing Power

5 Riding the Investment Roller Coaster

7 CalSTRS in Your Neighborhood

9 Teachers' Retirement Board Election Results

10 A Balanced Funding Strategy

continued on page 11

C a l I f o r N I a S tat E t E a C h E r S ’ r E t I r E m E N t S y S t E m

Pension buyout company advances lump sum to pension recipient.

Recipient redirects monthly pension payments to a bank account jointly owned with the company.

Pension buyout company withdraws funds from the joint bank account.

Also inside:

Roll Over to CalSTRS Pension2®

See page 8

S u m m e r 2 0 1 2

Pensions Improve California’s Public Education SystemBy Dana Dillon, Teachers’ Retirement Board Chair

A recent study by the National Institute on Retirement Security finds that pensions play a critical role in recruiting and retaining highly productive California teachers, which increases school effectiveness.

“The Three Rs of Teacher Pension Plans: Recruitment, Retention, and Retirement” analyzes the impact of defined benefit pensions on teacher retention and productivity. It validates a widely acknowledged concept in pension administration: there is a direct link between long-term, high-quality education and the retirement security of defined benefit pensions. My colleagues in teaching often tell me that the retirement security provided by their CalSTRS defined benefit is more important than immediate salary gains.

Additionally, defined benefit pensions save California school districts money by reducing expensive teacher turnover costs. The study finds that:

Productivity Defined benefit pensions help retain teachers across the state. Teacher productivity increases sharply in the first few years of teaching. Because longer tenured teachers are more effective teachers, the increased retention that pensions bring increases the overall quality of California public education.

Cost SavingsThe cost of teacher turnover is substantial, both in terms of financial cost and loss of productivity to the school district. Teacher retention saves school districts money. In 2003 alone, pensions saved school districts across California over $26 million in turnover costs.

RetentionPublic school teachers turn over less than private school teachers, largely due to their compensation packages, which include defined benefit pensions. Compared to defined contribution individual retirement accounts, such as 401(k)s, pensions help recruit and retain highly productive teachers longer.

CalSTRS2 • Retired Educator SUMMER 2012

CalSTRS Mission: Securing the financial future and sustaining the trust of California’s educators

Teachers’ Retirement Board Dana Dillon, Chair Harry Keiley, Vice Chair John Chiang Sharon Hendricks Michael Lawson Bill Lockyer Ana Matosantos Paul Rosenstiel Tom Torlakson

Jack Ehnes Chief Executive Officer

Christopher J. Ailman Chief Investment Officer

David Lindgren Editor

Veronica Espinoza Designer

Statements in this publication are general and the Teachers’ Retirement Law is complex and specific. If a conflict arises between information contained in this publication and the law, any decisions will be based on the law.

CalSTRS Retired Educator is published twice a year for retired members and benefit recipients of the California State Teachers’ Retirement System. Send your comments or suggestions to: Editor, Communications CalSTRS P.O. Box 15275 MS 34 Sacramento, CA 95851

Teacher Turnover Cost Savings Associated With Defined Benefit Pensions in California

The study is available at nirsonline.org.

1,825Additional Teachers Retained Under Defined Benefit Plans in 2003

26,101,517Turnover Cost Savings of Defined Benefit Pensions in 2003

Debunking Direct Deposit Myths

SUMMER 2012

CalSTRS Retired Educator • 3

Your Online Resource Myth: Direct deposits have to be deposited into a checking account.

Fact: We can deposit your benefit payment into a checking or savings account.

Myth: If I sign up for direct deposit, I am giving CalSTRS full access to my account.

Fact: The permission you are granting CalSTRS with direct deposit is for an electronic transfer of your benefit payment from CalSTRS into your bank account. We cannot see your account balance or any other account details, and we cannot withdraw money from your account.

Myth: Direct deposit is not any safer because my check is still mailed; it’s just mailed to the bank instead of to me.

Fact: With direct deposit, no paper check is ever mailed. Your money is electronically transferred over a secure connection from CalSTRS to your bank account.

Myth: With direct deposit, I won’t know how much money has been deposited into my bank account.

Fact: With direct deposit, you can call your bank or check online transactions through your bank’s website to verify the amount of the deposit. You can also view and print current and past benefit payment information from your myCalSTRS account.

Adapted From: Illinois Municipal Retirement Fund

myCalSTRS is your online resource to access and manage your personal information on file with CalSTRS. myCalSTRS offers the convenience of conducting business online any time.

With myCalSTRS, you can:

• Sign up for direct deposit.

• View and print your 1099-R forms and benefit payment information.

• Request a letter verifying your CalSTRS benefits.

• Manage your beneficiary and recipient designations.

• Complete and submit CalSTRS forms.

• Make changes to your tax withholding preferences.

• Request electronic delivery of newsletters and benefit payment statements.

• Update your mailing address, email address and other contact information.

• Ask questions and receive prompt, secure answers.

Register TodayStart using myCalSTRS today at CalSTRS.com. Registration is easy and provides immediate and secure access. The interactive, self-paced registration guide can help you through the registration process.

One-Time Death Benefit RecipientReviewed your one-time death benefit recipient information lately? You can change your death benefit recipient at any time, with no financial penalty.

CalSTRS4 • Retired Educator SUMMER 2012

Protecting Your Purchasing PowerPurchasing power is a measurement of how your retirement benefit keeps pace with inflation. For example, if your benefit stays the same, but prices double, your purchasing power is only 50 percent of what it was.

To help protect your purchasing power, your monthly retirement benefit automatically increases each year. This annual benefit adjustment is equal to 2 percent of your initial benefit. The adjustment begins on September 1 after the first anniversary of your retirement and appears in your October 1 payment. These adjustments are not compounded or tied to changes in the cost of living.

You may also receive supplemental benefit payments to further protect your purchasing power. CalSTRS makes these payments to you in quarterly installments when your benefit has fallen below a certain level of purchasing power. The purchasing power protection level is currently set at 85 percent of your initial benefit. The purchasing power of your retirement benefit is determined each year by the change in the All Urban California Consumer Price Index. Currently, members who retired in 1991 or earlier receive these quarterly payments.

These supplemental payments are intended to provide a consistent standard of living when prices are rising. When there is no or low inflation, as there has been in recent years, your retirement benefit retains all or most of its economic value. Therefore, your quarterly supple-mental payment may be the same or decrease—or you may no longer receive a supplemental payment.

These protections are not guaranteed benefits, and the California Legislature can reduce or eliminate them for new and existing members, even if they have already retired, if economic conditions dictate.

To help protect your purchasing power, your monthly retirement benefit automatically increases each year. This annual benefit adjustment is equal to 2 percent of your initial benefit.

85%

2%

The purchasing power protection level is currently set at 85 percent of your initial benefit. The purchasing power of your retirement benefit is determined each year by the change in the All Urban California Consumer Price Index.

SUMMER 2012

CalSTRS Retired Educator • 5

Riding the Investment Roller CoasterBy Chris Ailman, CalSTRS Chief Investment Officer

• We publish an economic report for the Teachers’ Retirement Board’s Investment Committee in every board agenda in the chief investment offi-cer’s report. It tracks some of the key economic statistics in an easy-to-read, color-coded format. To access board agendas, visit CalSTRS.com (select CalSTRS under Learn About and then select Public Meeting Notices and Agendas under Teachers’ Retirement Board).

• We also provide detailed information about how we’re moving the CalSTRS portfolio in quar-terly reports posted on CalSTRS.com (select Investments under Learn About and then select Quarterly Investment Reports under Portfolio).

We all need all of the information we can get to manage assets in these dynamic financial markets. Right now, 2012 looks just as daunting and challenging as 2011. Climb in and fasten your seatbelt—this should be quite a ride.

People often use a roller coaster as an analogy for the stock market. That imagery was never more apt than in 2011. Like a roller coaster, we started and finished the year at the same elevation but in between were violent gyrations, higher and lower. In fact, in 2011 the stock market exhibited five times the daily volatility of any year in the past six decades.

right now, 2012 looks just as

daunting and challenging as 2011.

Climb in and fasten your seatbelt—

this should be quite a ride.

So how does an investor navigate and survive this Wall Street roller coaster?

• Diversify. Don’t put all your eggs in one basket. As we do with the massive CalSTRS Investment Portfolio, spread your investments across different asset types and even different countries across the globe, if you can.

• Buy income streams, like high dividends from certain stocks or bond funds, but make sure you don’t take on too much risk to get those cash flows. In the CalSTRS portfolio we have the ability to buy and own apartment buildings and industrial properties that pay a steady cash flow. Plus we can invest in bank loans and mid-sized company loans that pay a steady income at a reasonable risk level. That’s a key way we can squeeze a positive return out of markets like 2011.

The most important thing you can do is ask questions and read the financial news. You can even use the CalSTRS Investments team as a resource:

Information regarding exemptions is current as of the publication of this newsletter. New legistation is pending. Stay up to date at CalSTRS.com.

CalSTRS6 • Retired Educator SUMMER 2012

Working After Retirement: All Exemptions Have Ended

All exemptions to the annual postretirement earnings limit ended June 30. Under state law, if you work in any CalSTRS-covered employment, you are subject to all applicable earnings limits.

The annual postretirement earnings limit and separation-from-service requirement apply whether you perform creditable service in the public school system as an employee, an independent contractor or an employee of a third party.

You can continue to receive your full CalSTRS retirement benefit, with no earnings limits, if you take a job outside of CalSTRS-covered employment.

Annual Postretirement Earnings Limit The annual postretirement earnings limit for the 2012-13 fiscal year is $31,020. If you return to work and exceed the earnings limit, CalSTRS will withhold your gross monthly retirement benefit until we collect all earnings in excess of the limit. However, we will not collect more than the total amount of your gross annual retirement benefit.

Separation-From-Service RequirementFederal law requires a separation from service after retirement for members under age 60. To ensure a separation from service if you are under age 60, CalSTRS will reduce your retirement benefit dollar for dollar up to your annual benefit amount by the amount that you earn in CalSTRS-covered employment during the six months following your retirement effective date or until your 60th birthday, whichever comes first.

Keep TrackWork closely with your employer to track your earnings reported to CalSTRS, as exceeding the annual postretirement earnings limit can significantly affect your retirement benefit.If you have questions, send us an online message using your myCalSTRS account or at CalSTRS.com/contactus, or call 800-228-5453.

CalSTRS in Your Neighborhood: Glendale Member Service CenterHave questions about your CalSTRS benefits and prefer to talk to a CalSTRS representative in person? In January, the new Glendale Member Service Center opened, offering the same level of service as our center in West Sacramento.

SUMMER 2012

CalSTRS Retired Educator • 7

CalSTRS Member Service Centers help fulfill our mission by helping you manage and enjoy your retirement. Both centers are fully staffed by CalSTRS personnel and:

• Are conveniently located for easy access.

• Provide validated parking for CalSTRS members.

• Provide walk-in assistance to all members.

• Review and accept forms.

• Offer a full array of CalSTRS publications, forms and applications.

• Offer convenient and consistent hours of operation, year-round:

» Monday through Friday, 8 a.m. to 5 p.m.

» Select Saturdays by appointment.

Many CalSTRS retirees in southern California are taking advantage of the services at the Glendale Member Service Center. Visit the Glendale center to:

• Change your address.

• Change your direct deposit.

• Change your tax withholding status.

• Update your death benefit recipient.

• Get a duplicate 1099-R form.

• Ask questions about a survivor benefits issue.

• Ask questions about postretirement earnings.

West Sacramento 100 Waterfront Place West Sacramento, CA 95605

Glendale 505 North Brand Blvd., Suite 200 Glendale, CA 91203

Contact CalSTRS

• Phone: 800-228-5453

• Web: CalSTRS.com/contactus

If you prefer to conduct your CalSTRS business online, you can access CalSTRS forms from your myCalSTRS account or on CalSTRS.com.

Member Service Center Locations

CalSTRS8 • Retired Educator SUMMER 2012

Pension Peace of MindCalSTRS is committed to preventing pension abuse. To enhance our efforts in this important area, we constantly review and improve our processes to ensure your pension fund is protected. Recent enhancements include:

• Adding automation to review whether specific compensation should be credited toward retirement.

• Increasing the focus on compensation during in-person reviews of school employers.

• Establishing the Compensation Review Unit to improve the reviews of potential pension abuse cases.

• Creating the Pension Abuse Reporting Hotline and online submission form.

Roll Over to CalSTRS Pension2®Open a CalSTRS Pension2 account and roll over your 403(b), 457, 401(k) or Traditional IRA from your former employer or other vendors. Take advantage of low fees and expenses.

CalSTRS Pension2 offers 403(b), Roth 403(b) and 457 plans. Pension2 features Easy Choice Portfolios designed to match your risk tolerance with your time horizon. Or choose from more than 20 professionally selected investments and build your own portfolio.

TIAA-CREF, a national financial services organization and the leading provider of retirement services in the academic field, is the program’s record keeper.

Contact a CalSTRS representative for details on how to roll over your Public Agency Retirement Services, CalSTRS Defined Benefit Supplement or Cash Balance Benefit accounts.

For more information, call Pension2 at 888-394-2060 or visit Pension2.com. The toll-free number is 855-844-2468.

It's staffed Monday through Friday from 8 a.m. to 5 p.m., and callers may leave a voice mail message 24 hours a day.

Pension Abuse Reporting HotlineThis toll-free hotline allows anyone to anonymously report cases of suspected pension abuse, including spiking—the inflation of pay for the purpose of increasing a retirement benefit.

Suspected pension abuse also can be reported using the online form at CalSTRS.com/pensionabusereporting or by writing the confidential CalSTRS mail station at CalSTRS, P.O. Box 15275, MS 16, Sacramento, CA 95851.

SUMMER 2012

CalSTRS Retired Educator • 9

Teachers’ Retirement Board Election ResultsThe two board members elected by preK–12 grade educators are:

• DanaDillon: a grade school teacher with the Weed Union Elementary School District. She most recently served as chair of the Teachers’ Retirement Board and was first elected in 2003. Ms. Dillon has been active in the California Teachers Association for many years, serving as state council representative and on the board of directors.

• HarryM.Keiley: a high school teacher with the Santa Monica-Malibu Unified School District. Mr. Keiley was first elected to the Teachers' Retirement Board in 2007. He has served as president of Santa Monica-Malibu Classroom Teachers Association and chair of the California Teachers Association’s Political Involvement Committee.

The board member elected by community college educators is:

• SharonHendricks: an associate professor of speech and part-time lecturer with the Los Angeles Community College District. She is a resident of Los Angeles. Ms. Hendricks has been a CalSTRS member since 2004.

The elected board members will serve four-year terms, which began January 1, 2012. Votes were cast by qualified CalSTRS active members and participants between October 1, 2011, and November 30, 2011.

Next year we’ll celebrate the 100-year anniversary of CalSTRS, and we need your help.

Help us create a visual history of CalSTRS by submitting photos, graphics or publications from your time as a California public school teacher.

Submissions can be sent electronically to communications@CalSTRS.com (include “CalSTRS 100-Year Anniversary” in the subject line) or mailed to:

CalSTRS 100-Year AnniversaryAttn: Kathy Halstead MS 34 P.O. Box 15275 Sacramento, CA 95851

Be sure to include your name, contact information and the best time to reach you.

Original submissions will be returned to you in a timely manner.

CalSTRS10 • Retired Educator SUMMER 2012

A Balanced Funding Strategy: Investment Return Assumption LoweredBy Jack Ehnes, CalSTRS CEO

In February, the Teachers’ Retirement Board voted to lower the investment return assumption a quarter of a percent to 7.5 percent. The move, based on the recommendation of outside actuarial firm Milliman, Inc., marks the second time in 14 months the board has lowered the assumed rate of return.

Under stable economic conditions, every four years the board evaluates the current investment return assumption to ensure estimated earnings are in line with future expectations. In December 2010, the board decided that a recent change in asset allocation and troubled economic conditions resulting from the market downturn warranted an off-schedule reevaluation. At that time, the board voted to reduce the investment assump-tion from 8 percent to 7.75 percent.

The most recent vote falls in line with the four-year cycle and does several things.

First, it further recognizes the conse-quences of the 2008-2009 economic crisis and the realities of projected CalSTRS investment performance for the foreseeable future. Last calendar year, the CalSTRS portfolio earned a 2.3 percent

return, down from 12.7 percent in 2010. Clearly, CalSTRS continues to experience fallout from global market conditions, which remain uncertain for investors. Add to that heightened market volatility in U.S. and foreign markets coupled with an unfolding debt crisis in Europe and a weak domestic recovery.

Our investment managers suggest that three years are needed before we begin to see signs of recovery. Keep in mind CalSTRS is a long-term, patient investor looking toward a 30-year horizon.

Second, it contributes to the current projected unfunded liability of $64.5 billion, which is based on the June 30, 2011, actuarial valuation—a snapshot of the Teachers’ Retirement Fund’s assets and liabilities.

It’s important to balance future funding needs with what we are asking of current and future generations. By lowering the assumption rate, the need for more funding does occur, but if we ask more than is needed of our new and current members, we’ve unnecessarily burdened them. Lowering the assumption rate below what is a reasonable earning

The companies typically emphasize that their arrangements are “not loans” in their contracts and marketing materials. Not only does this circumvent potential usury law violations, it also eliminates any required truth-in-lending statements or legally mandated interest rate disclosures. Consequently, retirees are likely unaware of the effective interest rate they are paying on these buyouts.

Marketing TacticsPension buyout companies prefer using “veteran,” “teacher” or “firefighter” in their business names. This marketing tactic, known as affinity naming, coupled with strategically placed website images of military men or women posing with presumed family members—or a teacher writing on a chalkboard—gives the impression that there is an affiliation with the government authority issuing the pension when none exists.

Another common marketing tactic includes statements meant to attract someone in need of cash, such as:

• “Get a lump sum of cash in a short period of time.”

• “This is not a loan that must be repaid out of pocket.”

• “You don’t need perfect credit to qualify.”

Read the Fine PrintPension buyout arrangements can be very costly. If you are considering this type of arrangement, read the proposed contract fully and make sure you understand all terms, conditions and consequences. Also, consult your financial and legal advisers before signing anything.

If you are involved in a pension buyout, or if you have been solicited for one, contact Tom Buffalo at tbuffalo@CalSTRS.com or call 916-414-1986.

Pension Buyouts Offer Cash at a High Cost continued from page 1

SUMMER 2012

CalSTRS Retired Educator • 11

expectation of 7.5 percent could present an unnecessary financial burden.

Lastly, it further underscores the reality that CalSTRS cannot invest its way to financial health and how imperative a funding plan is to the long-term health of the fund. What is needed to fund the existing benefit plan is an increase in contribution rates, which can be gradual and predictable.

We must have a responsible funding strategy that will protect the state General Fund, as well as uphold the state’s promise to teachers. And the longer it takes, the more the costs will rise. The Legislature and Governor must tackle the challenge of crafting a specific funding strategy since only they have the authority to do so.

f t g i y

PRSRT STDU.S. POSTAGE

PAIDPERMIT NO. 25

SACRAMENTO, CA

WEB CalSTRS.comClick Contact Us to email

403bCompare.com

Pension2.com

CalSTRSbenefits.us

CALL 800-228-5453 7 a.m. to 6 p.m.Monday through Friday

888-394-2060CalSTRS Pension2®Personal Wealth Plan

855-844-2468 Pension Abuse Reporting Hotline

WRITE CalSTRSP .O. Box 15275Sacramento, CA 95851-0275

VISIT Member Services100 Waterfront PlaceWest Sacramento, CA 95605

Find your nearest CalSTRS office at CalSTRS.com/localoffices

FAX 916-414-5040

CalSTRS Resources

STAY CONNECTED

printed on recycled paper

Go Green With Direct DepositHelp us conserve natural resources and reduce mailing costs. Sign up for direct deposit from your myCalSTRS account at CalSTRS.com. You can also view and print current and past benefit payment statements on myCalSTRS.

The Direct Deposit Authorization form is also available at . If you later change your bank, you can update your direct deposit instructions on myCalSTRS or by submitting a new form.

We debunk four myths about direct deposit on page 3.