finpro seminar lasf db plan update · 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 ons...

FinPro Seminar

LASF DB Plan update

February 2016

Agenda

Background

DB regulatory framework

LASF DB update

Investment DB strategy review

2

Fund facts

Since 1947

Collected over $12.3b in contributions/rollovers

Paid $8.3b in benefits to our members

Paid over $1.5b in pensions to our pensioners

Paid over $300m in group life insurance claims

102,000 member accounts

$7.6b of assets (as at 31/12/15) for our members

DB assets that comprise over a third of total FUM

3© 2016 Vision Super

Fund membership

www.visionsuper.com.au 4

0

20,000

40,000

60,000

80,000

100,000

120,000

1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011

Defined Benefit Pensions Accumulation/other Total

over

102,000 memberships

© 2016 Vision Super

$7.6

billionas at

31 December

2015

Funds under management

5

$0

$1

$2

$3

$4

$5

$6

$7

$8

1947-1960

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Billions


Defined Benefits promise

To pay a guaranteed benefit

– based on salary and years of service

LASF plan closed to new members on 31 December 1993

Pre 26 May 1988 members can opt to take a lifetime

pension – the majority are likely to do this going forward

All DB members can elect to take a deferred benefit


DB regulatory framework

APRA’s prudential standard - SPS 160

Need to be able to pay out all leaving service benefits at

all times

– Measured against the vested benefits not total service

benefits

SPS 160 is a funding straitjacket

– APRA driven – not actuarial

© 2016 Vision Super 8

APRA’s prudential standard - SPS 160

Minimum thresholds must be meet at all times

9

* Based on whether any relevant actuarial review is underway

If the VBI falls below the relevant threshold

– Restoration plan required

– VBI must be returned to at least 100% within 3 years

Quarter ending VBI threshold

September 97%/100%*

December 97%

March 97%

June 100%


What does this mean?

10

Action plan

– Contact Fund Actuary

– Actuarial investigation occurs

– Confirms position

– Trustee considers Fund Actuary’s finding and recommendations

– Consider various possible options

Plus

– Discussions with APRA including timeframe of call payments

– Ongoing communications with employers


LASF DB update

Actuarial investigation results 30 June 2015

No funding call recommended by the Fund Actuary

Contributions – no change in current arrangements

– Ongoing contribution rate of 9.5% p.a. (increasing with SGC)

– Additional contributions required to cover retrenchment

benefits

– Outstanding contributions from previous calls

Continue to consider funding position and future liquidity

requirements in setting investment policy


Favourable experience to 30 June 2015

VBI at 30 June 2015 – 105.8% v 30 June 2014 – 103.4%

Actual experience has been better than the assumptions

Change to investment return assumption


From 1 July 2014

to 30 June 2015

From

1 July 2015

Assumption Actual Assumption

Inv. return – net of tax 7.50% p.a. 9.0% p.a. 7.00% p.a.

Salary inflation 4.25% p.a. 3.7% p.a. 4.25% p.a.

Pension increases 2.75% p.a. 1.7% p.a. 2.50% p.a.

Financial position/Vested Benefit Index (VBI)

14

LASF Defined Benefit Plan

31/12/11(actual)

($m)

30/6/12(actual)

($m)

30/6/13(actual)

($m)

30/6/14(actual)

($m)

30/06/15(actual)

($m)

30/09/15(est.)

($m)

31/12/15(est.)

($m)

Plan assets $1,692.2 $2,084.9 $2,255.8 $2,354.9 $2,379.2 $2,314.7 $2,329.2

Vested

Benefits(VB)$2,211.0 $2,207.7 $2,240.0 $2,277.8 $2,248.4 $2,225.2 $2,230.0

VB surplus/

(shortfall)-$518.8 -$122.9 $15.8 $77.1 $130.8 $89.5 $99.2

VBI 76.5% 94.4% 100.7% 103.4% 105.8% 104.0% 104.4%


Investment experience since 31 Dec 2015

Impact of salary growth - decreasing as # active members reduce

As fund matures, volatility of investment returns is main driver for calls

Impact of pension indexation - increasing as # pensioners increase


VBI est.

@ 31 Dec 2015

Investment Return for

month of January 2016

VBI est.

@ 31 Jan 2016

LASF DB 104.4% pa -1.6% pa 102.7% pa

DB investment strategy review


DB investment beliefs

Investment objectives/considerations

Review demographic and liability profile

Revised strategic asset allocation

Other strategies

DB investment strategy review

18

Belief 8

• Real long-term target returns (after fees and taxes)

• Focus on achieving the returns assumed by the Actuary

• Downside risk management

Belief 9

• Primary risk is the need to make additional calls on

employers to fund liabilities

DB Investment beliefs


Belief 10

• Maximising net returns is more important than fees in their

own right

• “Value for money” for our fees

Belief 11

• Appropriate timeframe is three to five years

• Long-term nature of the liabilities of the Defined Benefit

Plan© 2016 Vision Super 19

DB Investment beliefs (continued)

Investment objectives


Achieve the long term actuarial return assumption

Adequate liquidity to meet benefits as they fall due

Low probability of VBI falling below 100% over future life

of Plan

21

Investment considerations

More aggressive strategy reduces LT employer funding, but:

– Increases risk/size of calls in ST; and

– Increases likelihood of a substantial surplus

More defensive strategy reduces LT funding from investments, but:

– Reduces risk/size of calls in ST; and

– Leaves Plan better positioned to capitalise on market corrections

Liquidity

– Property/Infrastructure ideal match against liabilities, however

as DB Plan matures will require higher level of liquidity to pay benefits.


Demographic and liability profile as at 30 June 2015

DB sub plan LASF DBCity of

MelbourneParks Victoria

# Active/Pension

members3,557/4,818 ~100 <100

# Deferred

beneficiaries1,781 - -

Avg age (actives) over 55 about 55 over 55

Benefit typelump sum/lifetime

pension optionlump sum lump sum

VBI margin low/medium high low/medium


LASF DB strategic asset allocation (de-risking)

23

ASSET CLASS To 30 June 2015 (%) From 1July 2015 (%)

Australian Equities 25.0 20.5

International Equities 20.0 20.5

Private Equity 2.0 -

Multi-Asset 7.0 5.0

Absolute Return 6.0 5.0

Infrastructure 9.0 9.0

Property 9.0 9.0

Floating Rate Debt 7.0 7.5

Diversified Bonds 10.0 17.5

Cash 5.0 6.0

TOTAL 100.0 100.0

Defensive 31.4 39.2

Growth 68.6 60.8


LASF DB investment strategy de-risking

Reduce investment risk

– Lower risk ->less volatility -> more predictability

Also reduces expected future returns

Aim to dampen down the investment return volatility

Immediate impact on VBI

– (1% reduction in expected returns, reduces VBI by 3%)

24

ACTUARIAL ASSUMPTION To 30 June 2015 From 1 July 2015

Investment return – net of tax 7.50% p.a. 7.0% p.a.


Introduced tail-risk hedging for LASF DB

Acts as insurance against the DB assets falling below

a specific value based on returns

Used to minimise losses in market downturns

Implemented 1 July 2015

– Trigger thresholds

– Thresholds/costs – reviewed regularly

Real time case studies


Tail-risk hedging experience to date

Tail-risk hedging added approx. $12m or +0.5% during

the volatile equity market periods of September 2015 and

January 2016

Should provide better protection than bonds in

periods of unexpected inflation

Profits taken when markets are volatile and

pay-off high


Dynamic asset allocation

Introduction of dynamic asset allocation framework

Allows LASF DB to change its asset allocation depending on the assessment of investment risks and opportunities

Considers valuations, economic trends, market trends and inherent risks in economies and markets (such as excessive debt) over a three year timeframe

Includes consideration of relative merits of foreign and domestic markets


Diversification

LASF DB is closed and will (eventually) pay out all monies

Nearly one quarter of LASF DB assets are in illiquid investments – e.g. private equity and property

Illiquid investments – Provide relatively strong returns with lower levels of volatility

– Profits from illiquid investments received over time

• Increase LASF DB liquidity position as they are released

– Currently in the harvesting phase and should provide strong returns.


Conclusion

Doing what we can to manage the investment risk within the

portfolio

Regular communications

– Quarterly VBI letters

– DB employer briefing sessions

– Ad hoc if needed

https://www.visionsuper.com.au/employers/employer-

resources/defined-benefit-information


https://www.visionsuper.com.au/employers/employer-resources/defined-benefit-information

30

Questions?

finpro seminar lasf db plan update · 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 ons...

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