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DBD Update

Important information for UniSuper Defined Benefit Division (DBD) members

DBD Update Video

These pages are designed to provide you with important information about the financial health of the Fund’s Defined Benefit Division (DBD).

The DBD and investment markets

During the Global Financial Crisis (GFC), we wrote to all DBD members regarding the DBD’s financial health and a ‘Clause 34’ monitoring period instigated at that time.

Clause 34 contains the rules for monitoring the financial health of the DBD.

Although the DBD’s financial health did improve post-GFC, market volatility since that time (caused by the sovereign debt crisis and continuing weaknesses in the US and European economies) has continued to affect the investment climate and investor confidence.

Clause 34 doesn’t apply to accumulation accounts, however those members with an accumulation account have experienced the direct impact of this negative market sentiment, and our DBD is not immune.

DBD members’ individual benefits haven’t traditionally been subject to market volatility, because investment returns don’t directly change the formulas used to calculate these benefits. However:

  • DBD member and employer contributions are pooled and invested in a portfolio comprising a mix of shares, property, fixed interest, cash and other investments
  • these investments are all exposed to varying degrees of market risk, and
  • the performance of almost all investments has been directly affected by the current conditions.

This ongoing volatility can be unsettling for investors, and we understand member concerns. That said, protecting the long-term financial position of the DBD is an absolute priority for us at UniSuper. We have taken and continue to take proactive steps specifically to manage the DBD, including adjusting its investment strategy with a view to improving its financial condition for the benefit of all DBD members, both short and long-term.

In addition to investment performance, the long-term financial position of the DBD is affected by various factors that may increase the long-term cost of providing defined benefits. To ensure the DBD’s long-term financial health it may be necessary to reduce benefits in future – even if there is some improvement in investment performance.

A new monitoring period

As set out in the Trust Deed, a formal actuarial review of the DBD is conducted at least every three years and will now be conducted annually. This review makes a full assessment of the DBD’s financial position and its ability to pay members’ benefits as they become due.

The actuarial review of the DBD as at 30 June 2011 indicated that the financial health of the DBD has deteriorated since the previous review in 2008. In light of this deterioration, and in view of continued market volatility, the Trustee Board has now triggered a new monitoring period under Clause 34 of the UniSuper’s Trust Deed.

As with the monitoring period triggered in 2008, the new monitoring period will also be at least a four-year process, part of which will run concurrently with the monitoring period triggered in 2008. This means that benefit reductions could be considered at the end of either or both monitoring periods.

What is Clause 34?

View amended Clause 34

Clause 34 sets out the rules for how the Trustee monitors the financial health of the DBD. Clause 34:

  • forms a critical part of UniSuper’s governance structure for the DBD
  • is designed to allow the Trustee to take action to improve the long-term financial security of the DBD if, after at least a four year monitoring period, there continues to be a funding shortfall; and
  • provides for how defined benefits may ultimately be reduced at the end of a monitoring period.

What’s the process?

The process under Clause 34 works as follows:

  1. Where an actuarial review determines that the Fund’s assets may not be sufficient to cover liabilities, a monitoring period of at least four years is triggered during which the DBD will be closely monitored. 
  2. At the end of this period, the actuary assesses the financial health of the DBD and provides advice and guidance to the Trustee. The Trustee considers the advice of the actuary in light of the circumstances at that time.  
  3. The Trustee decides whether benefit reductions should be made, taking into account the comparative overall effect on the financial security of the DBD if benefit reductions are made and if they are not made.
  4. If, the Trustee considers that benefit reductions should be made, this must be done on a fair and equitable basis for all DBD members.

What does this mean for you?

As at 25 November 2011, there are no immediate changes for our members and there is nothing you need to do. However, all DBD members, and in particular those who have recently commenced employment with a DBD employer and are currently deciding whether to remain in the DBD or move to Accumulation 2, should bear in mind the possibility that reductions to the current level of defined benefits may ultimately be required. You may wish to seek financial advice before making your decision.

We’ll provide regular DBD updates on this site throughout the monitoring period.

Looking ahead

Protecting the long-term financial position of the DBD is a key priority for us at UniSuper.
Although a final decision about any reduction in benefits won’t be made until 2013, your Trustee Board has already started its contingency planning with the actuary and, as you would expect, will be liaising with the regulator.

It’s important for you to be aware that if benefit reductions are required, they could include reductions to the future rate at which your defined benefits accrue, reductions to the current value of your defined benefit, or a combination of both, depending on the circumstances when the current monitoring period concludes.

The Trustee will continue to carefully monitor the funding position of the DBD and will provide regular updates where relevant.  Two key measures that help inform the Trustee of the DBD’s financial health are known as the ‘ABI and VBI’. You can learn more about these measures on our Monitoring the DBD page.

We’re taking prudent, sensible and thoughtful steps, by triggering monitoring periods, regular reviews and working with the actuary, to manage the risks to the DBD pool. However DBD members should be aware that there is a chance of defined benefits being, in some way, reduced in the future.

Improvements we’ve made

The UniSuper Board recently approved changes to Clause 34 to provide certainty and clarify in the practical operation and application of the Clause – without changing its essential framework. These changes allow the Trustee to:

  1. employ prescribed objective measures to track the DBD’s financial health, as a trigger for the commencement of monitoring periods and the consideration of benefit reductions, and
  2. consider whether benefits should be reduced if the DBD continues to be insufficient (rather than requiring that benefits must be reduced) at the end of a monitoring period. This enables the Trustee to consider the current market conditions and outlook, as well as the actuary’s report and any other relevant information, before making any decision to reduce benefits.

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This information is current as at 25 November 2011.  It is general information only and is not intended to be advice.  It has been prepared without taking account of your individual objectives, financial situation or needs.  Before deciding to acquire, hold or change an interest in any UniSuper product, you should consider whether this information is appropriate for your personal circumstances and consider the relevant product disclosure document for your membership category, available from your employer or UniSuper.

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