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Investment option changes and operational risk reserve

Posted 21 May 2013 1:24pm

Investment option changes

From 1 March 2013, Commonwealth Superannuation Corporation (CSC), as trustee of MilitarySuper, changed investment return objectives and target asset allocations for some of the MilitarySuper investment options.

The changes do not impact on the determination of your benefit entitlements within MilitarySuper that reflect the special nature of service in the ADF.

The new investment objectives are set out in the table below:

Investment OptionInvestment Option ObjectiveInvestment Horizon
High Growth CPI + 4.5% 15 years
Balanced CPI + 3.5% 10 years
Growth CPI + 3.5% 10 years
Conservative CPI + 2% 5 years

 

CSC has changed the investment objectives for these options because we expect that, for the same level of risk taking, average investment returns in the decade ahead will be lower than those generated in the stronger growth environment of the 1980s -2000s. This reflects the ongoing impact of the global financial crisis. As developed economies reduce their debt, growth in economic activity and in corporate earnings is likely to be lower, on average, than in the decades preceding the crisis.

CSC believes that it is important to reflect our view on future investment returns into investment objectives. This allows you to make informed choices about which investment options are most suitable for you, based on those objectives and the tolerance for risk within each investment option.

For the Growth option (the default option) tolerance for risk is defined as a 20% probability of loss. This is broadly equivalent to an expectation that the Growth option is likely to generate at least one year of negative returns in every five years. CSC expects that, to maintain this tolerance for risk, real returns for the Growth option (in other words, returns above inflation) are likely to average around 3.5% per annum over the next decade. Importantly though, in any one year, real returns may vary materially.

Target asset allocations for investment options have also changed. Asset allocations and further information about the impact of investment returns on your benefit is available in the MilitarySuper Product Disclosure Statement (PDS) and the Member Investment Choice Guide. Both documents are available from the MilitarySuper website.

Renaming investment options

Some other changes to investment options which will occur from 1 July 2013 are:

  • the High Growth option will be renamed Aggressive
  • the Growth option will be renamed Balanced
  • the Conservative option will be renamed Income Focused.

Options are being renamed primarily to better reflect underlying objectives and asset allocations.

There is no change to the Cash option.

Closing investment options

CSC is also taking steps to reduce the number of investment options offered. This is so we can focus investment effort on a smaller number of investment options which invest across various asset classes. The current Balanced and Growth options within MilitarySuper invest across the same asset classes and have the same investment objectives. The current Balanced option also has a relatively small amount of funds in it compared to the Growth option, with less than 1% of fund assets invested in the Balanced option and over 92% invested in the Growth option. In the interests of providing clearer investment choices for members, reducing the number of investment options that need to be managed and achieving efficiencies associated with that, CSC believes that it makes sense to merge the current Balanced option with the Growth option, and to call the merged investment option Balanced.

I am currently invested in the Balanced option. What do I need to do?

You do not need to do anything straight away.

Unless you choose to switch your investment or change your future contributions profile, your investment will remain in the Balanced option through to October this year. From 1 July 2013, you will not be able to switch monies into the current Balanced option, or elect to change to receive future contributions into the current Balanced option.

Towards the end of October, any monies in the current Balanced option will be transferred into the current Growth option. Any contributions being made into the current Balanced option will be directed to the current Growth option from November this year.

As is the case now, you can choose to switch your current and future investments by completing the Investment Choice form available from the website or online via your Member Services Online account.

If you are invested in Balanced, we will remind you again about your options closer to October this year. If you have any questions in the meantime, please contact us on 1300 006 727.

Operational Risk Reserve

The Government’s Stronger Super reforms require trustees of all super funds to establish and maintain an operational risk reserve from 1 July 2013. The purpose of a risk reserve is to provide a source of financial resources to protect member’s interests should an operational failure occur that results in losses to the Scheme or to members. An operational failure may occur due to inadequate or failed internal processes, people and systems or from external events. Use of an inaccurate unit price to process a transaction is an example of an operational failure that could lead to a Scheme or member loss, which may be addressed through the use of the operational reserve.

CSC has set a target funding level for the risk reserve of $16M (which represents approximately 0.40% of funds held within MilitarySuper).

CSC will build up the risk reserve over time to minimise the impact on current members. Based on the current funds held within MilitarySuper, from 1 July 2013 an amount of 0.14% p.a. will be accrued from unit prices of the MilitarySuper investment options. This will result in a minor impact on the unit prices and investment earnings of investment options. It is expected that the target funding level will be met after three years, but this could change if an operational failure occurs within that period which requires use of the reserve. CSC will provide an update if there are material changes to the operation of the risk reserve. CSC will be monitoring the build up of the operational risk reserve quarterly to ensure it remains on track.

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