Pensions Delivery Case Study

Tony Lally CEO, Sunsuper30 October 2007

Rotman / ICPM / Netspar Maastricht University

Discussion Forum

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Superannuation in Australia

• A$1,150bn in assets• Four major segments

- Industry funds- Retail funds/Mastertrusts- Self-managed funds (<5 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 (@ 20 Sept 2007)

• Additional benefits with Age Pension- Concession Card- Rental Assistance and Pharmaceutical Allowance

• Complicates retirement planning• Significant focus for financial planners

Full pension

Part pension

No pension

Assets Up to $166,750

Sliding scale Over $529,250

Income Up to $3,432pa

Sliding scale Over $38,760

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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 - A$12.7bn• 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 A$150m in post-retirement product (1.2% of fund)

Sunsuper - 25% of members hold 85% of funds

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

Contributions-employer

Contributions-member

Investment income Lump sums Pensions

Tax-deductible

Non-deductible

Pre-retirement - Taxed at 15%

Member contributions- no tax

Income taxed at marginal rates

Taxed at 15%

No tax After pension commences- No tax

Up to $135,590 – No tax

May be 15% tax rebate & tax free amount

Over $135,590- tax at 16.5%

Age-based limits

No limits Lump sum RBL $678,149 (excl member conts.)

Pension RBL rules

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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 1. Age Pension qualification2. Tax 3. 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• TaxationContributions

-employerContributions-member

Investment income

Lump sums Pensions

Tax-deductible Non-deductible Pre-retirement - Taxed at 15%

Member contributions- no tax

Income taxed at marginal rates

Taxed at 15% No tax After pension commences- No tax

Up to $135,590 – no tax

May be 15% Tax rebate and deductible amount

Over $135,590- tax at 16.5%

Age-based limits No limits Lump sum RBL $678,149 (excl member conts.)

Pension RBL rules

After age 60 Tax-free Tax-free

Limit $50,000 pa Limit $150,000 pa No limits No limits

Pre

1/7

/07

1/7/

07ch

ange

s

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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

YearAll assets

($bn)

Pension assets ($bn)

Pension assets %

2005 765 145 19

2010 1,332 367 28

2015 2,159 712 32

2020 3,332 1,095 33

Source: Rice Warner Actuaries, IFSA Presentation, 2 August 2007

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Three distinct phases of retirement

ActiveAges 60 to 75

PassiveAges 65 to 85

FrailAges 75 to 100

Continuation of lifestyle but more time for leisure, travel and family

Shift to more passive activities, travel is closer to home

Restricted mobility means leisure activities are limited

Some part-time work Some unpaid charitable work

Reduced contribution to economy and society

Increased expenditure on leisure, many are still net savers

Increased expenditure on health. More frugal lifestyle.

Increased expenditure on health and aged care

Housing upgrade Housing downsizing Retirement village or nursing home

The world closes down gradually with advancing ageSource: 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 balances1. Draw down lump sum over 0 – 10 years (0-$50,000)

2. Income to supplement Age Pension ($50,000-$166,750) (Single homeowner)

3. Income integrated with Age Pension ($166,750 - $529,250) (Single homeowner)

4. Independent income ($529,250+) (Single homeowner)

• Assumptionso Lower balances mean lump sums over a short period post retirement – no

incomeo No Age Pension before age 65o Transition to retirement strategy requiredo Where members do not fit assumptions - advice/more information will be

required

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Longevity

1. There are three inter-relationshipsa) How much is available for investment?

b) How long is it paid for?

c) What is the income level?

2. Two of these are known, the third can be calculated

3. Pensions have historically focussed on maintaining purchasing power which ignores

a) Integration with Age Pension

b) Age Pension increases in line with inflation

c) Income needs deteriorate as people age

d) Age Pension is the safety net for those with lower balances

4. A new approach is needed

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Longevity options for members with age pensionsOption 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 pensionFallback Telephone adviceFallback 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 (cont’d)• 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 (cont’d)• 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

Segment No Advice MAC Financial Planner

100% Age Pension

80% 15% 5%

Part Age Pension 20% 50% 30%

No Age Pension 80% 10% 10%

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Sunsuper retirement income solutions (cont’d)• 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.o Infrastructureo Propertyo Utilitieso High-yielding shareso Corporate bonds

- Limited other options, one lower risk and one higher risk

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Sunsuper retirement income solutions (cont’d)• 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 youThis 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.