Pensions Delivery Case Study

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Pensions Delivery Case Study

• Tony Lally CEO, Sunsuper
• 30 October 2007

Rotman / ICPM / Netspar Maastricht
University Discussion Forum
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Superannuation in Australia

• A1,150bn in assets
• Four major segments
• Industry funds
• Retail funds/Mastertrusts
• Self-managed funds (lt5 members)
• Corporate funds
• Corporate funds moving to mastertrusts/industry
  funds (down from 555 in June 2006 to 290 in June
  2007)

1. APRA Statistics Quarterly Superannuation
Performance June 2007.
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Robust growth outlook for superannuation
Source Trowbridge Deloitte Super 2015 model
(AMP Capital presentation March 2007)
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Government Age Pensions in Australia

• No social security contributions
• Age pensions are means tested
• Assets test
• Income test
• Based on Single Person, Homeowner (_at_ 20 Sept
  2007)
• Additional benefits with Age Pension
• Concession Card
• Rental Assistance and Pharmaceutical Allowance
• Complicates retirement planning
• Significant focus for financial planners

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Sunsuper background

• Established 1/10/1987
• Sponsors Commerce Queensland, Queensland
  Council of Unions/AWU
• Employers - 60,000
• Members 1,000,000 (3rd largest)
• Funds at 30/6/2007 - A12.7bn
• Six Directors, three nominated by CQ, three
  nominated by QCU/AWU
• 85 staff
• Administration outsourced, 350 staff
• Investment management outsourced, Sunsuper team
  of 7 under CIO
• Compulsory employer contributions of 9 of salary
• Voluntary member contributions
• Major focus to date on benefit accumulation
  pre-retirement
• At 30/6/2007 only A150m in post-retirement
  product (1.2 of fund)

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Sunsuper - 25 of members hold 85 of funds
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Sunsuper - members are under 40 funds are over 40
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Pension regulations in Australia pre 1/7/2007

• Benefits preserved to age 55 (60 if born after
  June 1964)
• Taxation

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Pension market in Australia pre 1/7/2007

• All investment earnings tax-free once pension
  payment commences
• Most fund members take lump sums on retirement
• Mainly private retail pensions sold by financial
  planners
• Products
• Lifetime annuities
• Term annuities
• Allocated pensions
• Some products have concessions for Age Pension
  means test (eg lifetime annuities)
• Financial planning priorities
• Age Pension qualification
• Tax
• Investments

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Pension regulations in Australia -1/7/2007 changes

• Assets can remain in super fund indefinitely
• Members can contribute at same time as drawing
  down benefits after age 55
• Transition to retirement
• No limit on benefits payable
• Taxation

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Implications of 1/7/2007 changes

• Members will leave assets in super funds
  post-retirement
• Rapid growth in post-retirement market
• Older Australians will transfer non-super assets
  into super
• Many people will transfer assets into super
  approaching retirement
• New pension products required
• Initial focus on transition to retirement
  products (salary sacrifice/pension drawdown)
• Longer term solutions under development
• Some gimmicks launched (eg linking ATM to pension
  accounts)
• Sunsuper developing a complete retirement income
  solution

Source Rice Warner Actuaries, IFSA
Presentation, 2 August 2007
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Three distinct phases of retirement
Source Rice Warner Actuaries, IFSA
Presentation, 2 August 2007
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Pension provision needs to reflect lifestyle needs

• Highest expenditure in Active Phase
• Capital needs (upgrade white goods, house, car)
• Holidays (trip of a lifetime)
• Reduction in needs as lifestyle becomes more
  frugal in Passive Phase
• More conservative (no scope to recover from
  losses)
• Local holidays, retain car longer
• Discount lifestyle
• Many retirees run out of superannuation and fall
  back on Age Pension
• Expenditure in Frail Phase grows
• Health costs peak, although there are significant
  government subsidies for health expenditure in
  these years
• Decision-making ability is diminished
• Aged care and accommodation needs change
• Sale of home to fund nursing home care in old age

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Segmented approach required

• Retirement can occur at any age
• Solutions need to consider key trigger retirement
  ages (55, 60, 65)
• Retirement at other ages need intermediate
  solutions
• Segment members at retirement by balances
• Draw down lump sum over 0 10 years (0-50,000)
• Income to supplement Age Pension
  (50,000-166,750) (Single homeowner)
• Income integrated with Age Pension (166,750 -
  529,250) (Single homeowner)
• Independent income (529,250) (Single homeowner)
• Assumptions
• Lower balances mean lump sums over a short period
  post retirement no income
• No Age Pension before age 65
• Transition to retirement strategy required
• Where members do not fit assumptions -
  advice/more information will be required

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Longevity

• There are three inter-relationships
• How much is available for investment?
• How long is it paid for?
• What is the income level?
• Two of these are known, the third can be
  calculated
• Pensions have historically focussed on
  maintaining purchasing power which ignores
• Integration with Age Pension
• Age Pension increases in line with inflation
• Income needs deteriorate as people age
• Age Pension is the safety net for those with
  lower balances
• A new approach is needed

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Longevity options for members with age pensions

• Option A (level total income)
  Option B (level fund income)

Option C (flying start)
Option D (preserve capital)
Initial balance 310,000
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Longevity options for members without age
pensions
Option A (level total income)
Option B (inflation-linked)

Option C (flying start)
Option D (preserve capital)
Initial balance 1,000,000
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Sunsuper retirement income solutions

• Strategy
• Build on the trust based on many years membership
• Provide options which are simple
• Pro-active member management
• Minimise requirement for advice
• Step 1 Information for decision on pension
• Fallback Telephone advice
• Fallback Face to face advice
• Pre-retirement member engagement
• Assemble required member data (retirement date,
  retirement income needs, assets etc.)
• Transfer all super assets to Sunsuper
• Provide appropriate retirement planning tools
  (tailored statements, written and web based tools
  eg video, calculators)
• Pre-dispose members to retire with Sunsuper
• Free advice/information support provided by phone
  via Member Advice Centre (MAC)
• Face to face advice available from Sunsuper
  financial planners (fee for service)

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Sunsuper retirement income solutions (contd)

• Transition to retirement
• Salary sacrifice and drawdown pension
  concurrently
• Two accounts needed, contribution account is
  taxed at 15 on earnings, pension account is
  tax-free
• More complex and requires higher level of advice

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Sunsuper retirement income solutions (contd)

• At retirement
• Segmented approach based on eligibility for Age
  Pension
• Provide limited choices
• Income level or expiry age for pension chosen by
  member
• Best endeavours
• Not indexed
• Access to capital if required, reset income or
  expiry age
• Target for self-select vs advice

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Sunsuper retirement income solutions (contd)

• Payment options
• Directly to bank account
• Monthly
• Tax-free
• Investment options
• Default option based on real fund holding
  assets with high income and lower asset value
  volatility eg.
• Infrastructure
• Property
• Utilities
• High-yielding shares
• Corporate bonds
• Limited other options, one lower risk and one
  higher risk

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Sunsuper retirement income solutions (contd)

• Post-retirement
• Annual statement, reset income level or expiry
  age
• Provide option to amend original selection
• Report on investments
• MAC/financial planners available for
  discussion/advice

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Summary

• Traditional pension provision will not meet
  retirees needs
• Guarantees are too expensive
• Retirees want flexibility to reflect changing
  lifestyles as age advances
• Income needs reduce with advancing age
• Aged care is a special need requiring other
  considerations outside super (eg sale of home)
• Best endeavours can best meet retirees needs when
  matched with
• simple but adequate communication/advice
• appropriate investment processes
• Age Pension as safety net

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Thank you

• This presentation contains general advice and
  does not take into account the investment
  objectives, financial situation or needs of any
  particular individual. Because of this you should
  consider the appropriateness of the advice,
  having regard to your own particular objectives,
  financial situation and needs before acting on
  any advice.
• You need to apply the concepts to your own
  situation before making an investment decision. 
• You should obtain and consider a copy of the
  Product Disclosure Statement (PDS) before making
  a decision to acquire, or continue to hold the
  product. You can obtain a PDS by contacting the
  Customer Service Hotline on 13 11 84 or by
  visiting www.sunsuper.com.au.
• Before making a decision to switch between
  superannuation funds you should consider whether
  there is any impact from exit fees, withdrawal
  fees or loss of other benefits.
• This publication has been prepared and issued by
  Sunsuper Pty Ltd (ABN 88 010 720 840) (AFSL
  No.228975) (RSE Licence No. L0000291) which is
  the Trustee of the Sunsuper Superannuation fund
  (ABN 98 503 137 921) (SPIN SSR 0100 AU) (RSE
  Registration No. R1000337). While it has been
  prepared with all reasonable care, no
  responsibility or liability is accepted for any
  errors or omissions or misstatement however
  caused. All forecasts and estimates are based on
  certain assumptions which may change. If those
  assumptions change, our forecasts and estimates
  may also change. Contributions to superannuation
  are subject to the preservation rules.
• Sunsuper Financial Services Pty Ltd (ABN 50 087
  154 818) (AFSL No. 227867) is a wholly owned
  subsidiary of Sunsuper Pty Ltd.