Update for Defined Benefit Pension members

In 2009, we wrote to all Defined Benefit Pension members to let them know about a ‘Clause 34’ monitoring period that was triggered at the time. This monitoring period was triggered to keep a close eye on the Defined Benefit Division’s financial health in the wake of the Global Financial Crisis.

This page provides a snapshot of the Division’s current financial health, improvements we’re making with a view to protecting the long term financial position of the Division, and where you can go for more information.

Please note that your pension is not currently affected by these latest developments, and there’s nothing you need to do. However DBD members, including DBD Pension members, should bear in mind the possibility that reductions to the current level of defined benefits (including defined benefit indexed pensions)may ultimately be required.

How your Indexed Pension is funded

If you choose a Defined Benefit Indexed Pension, your pension entitlements are funded from a pool of assets know as the DBD, which also funds the entitlements of other Indexed Pension members and DBD members. The DBD is designed on the basis that, in the long term, the investment returns on the investment pool are expected to be sufficient for the DBD to provide UniSuper's defined benefits, although this is not guaranteed, and even though, over short periods, the funding position may vary with investment volatility.

Continued volatility

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.  You can read more about Clause 34 here.

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.

UniSuper members with Accumulation accounts have experienced the direct impact of this negative market sentiment and our DBD is not immune. 

How does investment volatility affect DBD pensions?

DBD pensions 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. 

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 UniSuper’s Trust Deed, 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.

This ongoing volatility can be unsettling for investors, and we understand member concerns. That said, protecting the long-term financial position of the DBD and DBD pensions 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 and pensioners, 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.

What does this mean for you?

As at 25 November 2011, there are no immediate changes to your pension, your regular payments aren’t affected, and there’s nothing you need to do. However, all DBD members, including pension members, should bear in mind the possibility that reductions to the current level of defined benefits may ultimately be required.

Although a final decision about any reduction in benefits will not be made until 2013, the Trustee has already started its contingency planning with the actuary and, as you would expect, will be liaising with the regulator. It is important for you to be aware that, if benefit reductions are required, they could include reductions in the amount of your pension payments, reductions in indexation and/or not indexing your pension in any one or more years.

The Trustee will continue to carefully monitor the funding position of the DBD, and will provide regular updates on this website where relevant.

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.

Find out more about:

• How the investment markets can impact the DBD
• How UniSuper monitors the ongoing financial health of the DBD
• Investment updates

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. You may also wish to obtain advice from a licensed financial adviser.