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
© 2016 Vision Super
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
6© 2016 Vision Super
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
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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%
© 2016 Vision Super
What does this mean?
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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
© 2016 Vision Super
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
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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
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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)
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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%
© 2016 Vision Super
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
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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
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DB investment beliefs
Investment objectives/considerations
Review demographic and liability profile
Revised strategic asset allocation
Other strategies
DB investment strategy review
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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
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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
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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
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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.
© 2016 Vision Super
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
22© 2016 Vision Super
LASF DB strategic asset allocation (de-risking)
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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
© 2016 Vision Super
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%)
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ACTUARIAL ASSUMPTION To 30 June 2015 From 1 July 2015
Investment return – net of tax 7.50% p.a. 7.0% p.a.
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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
25© 2016 Vision Super
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
26© 2016 Vision Super
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
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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.
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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
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Questions?