One of the key advantages offered by the DBD is greater protection from the effects of poor investment market performance, as occurred most recently during the Global Financial Crisis (GFC). Here we illustrate how the respective benefits of a DBD member and an Accumulation 2 member would have been impacted by investment performance over a 13 year period beginning 1 July 2000.
July 2000: Rob and Nick are UniSuper members with a lot in common
They have the same annual salary ...
They are the same age ...
They receive the same super contributions ...
And have the same retirement savings
However they have different super products
|Rob is a unisuper Defined benefit division member of 15 years. Formula-based benefits, based on salary and years of service. The main advantage of the DBD is a cost-effective smoothing of investment returns achieved through collective risk-sharing.
||Nick is an Accumulation 2 (A2) member invested in the Balanced option. Accumulation 2 members have market-based benefits, determined by a number of potential investment options covering a range of sectors and risk categories.
July 2013: A 13 year review of Nick and Rob’s benefits
A 13 year period, which encompassed the GFC has been chosen to illustrate that the DBD can provide members with a greater degree of certainty than an accumulation-style benefit, which can be quite volatile. For some members this greater certainty may be very important, particularly as they approach retirement. If we were to consider different periods, the results may be very different from those indicated below. Different results could also arise depending on the profile of the particular member (age, salary and service length) and the accumulation investment option selected. Note also that the Trustee has announced reductions to how future benefits will accrue from 1 January 2015.
Protection and predictability
Using actual investment returns, the graph above shows two key DBD strengths when compared with an accumulation-style benefit:
Protection from investment market downturns
With the pooling of assets across the DBD membership, the DBD can provide benefits that are not directly subject to volatile market movements. Even during the GFC, one of the worst economic downturns in recent history, DBD benefits were paid in full.
Increased ability to predict future benefits
Unlike an Accumulation arrangement, DBD members can better plan for their retirement as defined benefits are based on a salary-based formula and are not directly exposed to investment market downturns.
Rob's DBD benefit shows steady growth
The darker blue line shows Rob’s benefit as the DBD formula delivers an improving benefit based on rising salary, age and years of service. Even during an extreme market downturn, Rob experienced no reduction to his DBD benefit.
Nick's accumulation-style benefit mirrors the markets
Nick’s contributions in 2008 helped shield his balance from extreme falls brought about by the GFC. But even with those contributions, Nick’s balance fell during 2008. And even with the investment market recovery, Nick’s benefit was lower at 30 June 2013 than Rob’s DBD benefit. Over the 13 year period the value of Nick’s benefit was also more volatile.