January 2008 Favorable Experience Dividends

What is the Favorable Experience Dividend (FED)?
The FED is a one-time lump-sum payment that is added to the normal January benefit check. It is paid only one time during the year. The Iowa Legislature created the FED to help offset the negative impact that inflation has on pensions.

Who is eligible for a FED?
To be eligible for the FED, a member must be retired for 1 full year with benefits starting after June 30, 1990, and before March 1, 2007.

How does IPERS determine the amount of each FED?
The formula used to calculate an individual dividend amount is as follows:

Where do the FED payments come from?
In 1998, the Iowa Legislature transferred money from the General Retirement Trust Fund into a Favorable Experience Dividend reserve account. IPERS pays the FED from the reserve account. IPERS can transfer more money from the General Retirement Trust Fund to the reserve account only when IPERS is fully funded and will remain fully funded after a transfer. The last transfer was in 2001. However, the fund is credited with gains (or losses) from investments.

 How is the dividend rate determined?
The Chief Executive Officer gets advice from the IPERS Benefits Advisory Committee and then decides what the rate should be. By law, the highest the rate can be is 3 percent. The rate has been frozen at 1.07 percent since 2003 to extend the number of years IPERS can pay the dividend. This also treats retirees who receive the FED and those who receive a November dividend more equitably. Those who retired before July 1, 1990, have received no increase to their November dividend since 2001.

 If IPERS’ investment returns are lower than expected this year, will I still receive a FED payment?
The term “favorable experience” applies to the funding of the reserve account, not to the annual investment return. IPERS pays a dividend if the balance in the reserve account is adequate.

 Are future FED payments guaranteed?
No. IPERS estimates it can pay dividends until 2015. This estimate assumes there are no transfers to the reserve account, the account earns at least 7.5 percent on investments, and the dividend multiplier stays frozen at 1.07 percent.

Will increasing the contribution rate on active employees and their employers add money to the FED reserve account?
No. The contribution rate increase passed by the Iowa Legislature was necessary to fund the guaranteed future pension benefits for current active members. While the increase will not directly impact the FED reserve account, it may have an indirect impact by improving the overall financial condition of the IPERS Trust Fund over time.