On Thursday, December 17, SDCERS' Board of Administration approved staff's recommendation to lower the interest rate on DROP Participation Accounts from 3.54% to 2.9%, effective January 1, 2010. The DROP Annuity Rate will remain unchanged at 5%.
DROP Participation Accounts are the accounts that Active DROP members (those still working) contribute to druing their participation period.
DROP Annuities are a payment option available to DROP participants after they retire from DROP. Under this payment option, retirees receive a monthly DROP payment (annuity) in addition to their monthly service retirement (pension) payment. The Board has the discretion to adjust the interest rates on the DROP Participation Accounts or Annuities at any time. But, when a DROP participant retires and selects the annuity option, the participant's annuity rate is locked in on the date of retirement and will not change thereafter.
Again, the DROP annuity Rate is not being changed at this time.
How DROP Interest Rates are Determined
Effective January 1, 2010, DROP Participation Accounts will be credited with interest at a rate of 2.9%, which is a composite of October’s 12-month trailing averages of three 5-year indices: U.S. Treasury securities, bank IRA CDs and High Quality Corporate Bonds.
DROP Annuity options will still be calculated at 5%. The October 2009 12-month trailing average of three 20-year indices (U.S. Treasury securities, High Quality Corporate Bonds and the Pension Benefit Guaranty Corporation’s immediate annuity rate) was 5.34%. However, the DROP annuity rate remained at 5% in accordance with the provisions of the San Diego Municipal Code that caps the annuity rate at no more than 5% when the DROP Participation Account rate is less than 5%.