Disclaimer. General Update 21/10/2014. Centrelink Deeming Changes. Age Pension Changes. Commonwealth Seniors Health Card Changes

Transcription

1 Disclaimer The information contained within this presentation is general in nature. It has been prepared without taking into account your objectives, financial situation or personal needs. Prior to making any acting on any of the information, you should consider whether the information is appropriate for your needs, objectives and circumstances. You should obtain a copy of the relevant product disclosure statement (PDS) prior to making a decision regarding any investment in any financial product. UniSuper defined benefits (including defined benefit pensions) are not guaranteed and are subject to the risk that the pool of assets supporting them may not be sufficient to meet all of UniSuper s defined benefit obligations. In the event of prolonged underfunding, clause 34 of UniSuper s trust deed provides a mechanism for defined benefits to be reduced on a fair and equitable basis. A clause 34 monitoring period was recently concluded and it was resolved to reduce the defined benefit formula from 1 January 2015 by changing the way Benefit Salary is determined as it applies to service on and after 1 January This change does not affect defined benefits or pensions that become payable before 1 January There are three further clause 34 monitoring periods in place, concluding on 30 June 2015, 30 June 2016 and 30 June This information is current as at October 2014 and is based on our understanding of legislation at that date. Information relating to the 2014/15 Federal Budget is based on our understanding of the proposals. The information provided in this presentation in relation to these announcements is subject to change and certain proposals may not become effective until they are enacted by Parliament. You should not rely on this information and it should be verified prior to making any decision The information contained in this presentation is not legal, taxation or accounting advice. Professional advice should be obtained before making any decisions. Whilst care has been taken in the preparation of this information, the accuracy or completeness of the information is not guaranteed. This presentation was prepared and issued by UniSuper Management Pty Ltd ABN , AFSL No: , which is the administrator of UniSuper Superannuation fund (ABN ). UniSuper Management Pty Ltd is wholly owned by UniSuper Limited (ABN ) in its capacity as trustee of the UniSuper Superannuation fund. If you would like to contact us please do so on or alternatively send us an to enquiry@unisuper.com.au 1 General Update Centrelink Deeming Changes Age Pension Changes Commonwealth Seniors Health Card Changes Non-concessional contributions UniSuper Advice 2 1

2 Centrelink Deeming Changes On 1 January 2015, changes will be made to the assessment of account-based Pensions for Centrelink income test purposes Account-based Pension Commencement Date Before 1 January 2015* 1 January 2015 onwards Assessment of pension income under Centrelink s Income Test Annual Pension less deduction amount Annual Pension deemed Important note:deeming changes do not apply to Defined Benefit Indexed Pensions or Commercial Rate Indexed Pensions. * And in continuous receipt of the Age Pension prior to 1 January What is deeming? A calculation used by Centrelink and Department of Veteran Affairs (DVA) to assess the assumed income value of financial assets in relation to pensions and allowances (income support), including: Newstart Allowance Widow Allowance Disability Support Pension Carer Payment Sickness Allowance Age Pension 4 2

3 Centrelink: Income and Assets tests AGE PENSION Entitlement under Income test AGE PENSION Entitlement under Assets test You receive the lower pension amount from the application of both tests. 5 What are the current deeming rates? Deemed Assets Singles: First $48,000 Couples (where at least 1 member is getting a pension): First $79,600 (combined) Single & Couples: all amounts in excess of the above DEEMING RATE 2% 3.5% 6 3

4 Example Margaret, age 65 and single, commences an account based pension with $500,000 drawing an income stream of $35,000 p.a. Account-based Pension Commencement Date Before 1 January 2015 Assessment of pension income under Centrelink s Income Test Annual Pension less deduction amount 1 January 2015 onwards Annual Pension deemed Additional amount assessed $4,907 7 Example Margaret, age 65 and single, commences an account based pension with $500,000 drawing an income stream of $35,000 p.a. Account-based Pension Commencement Date Before 1 January January 2015 onwards Assessment of pension income under Centrelink s Income Test $11,873 ($35,000 ($500,000/21.62)) $16,780 (48,000 x 2%) + ($452,000 x 3.5%) Additional amount assessed $4,

5 Deeming considerations Examples of when the deeming rules could apply to existing account based pensions: Rollover of an existing account based pension into a new account-based pension after 1 January 2015 E.g. to add or combine funds into the one account-based pension account Ceasing to receive the Age Pension after 1 January 2015 then later falling eligible 9 Deeming considerations Examples of when the deeming rules would not apply to existing account-based pensions (i.e. grandfathering provisions apply): Individual is in continuous receipt of the Age Pension prior to and after 1 January 2015 When the account-based pension reverts to a reversionary beneficiary: The reversionary beneficiary is in continuous receipt of the Age Pension or other Government income support 10 5

6 Deeming considerations What about for couples where one member of the couple is not eligible for an Age Pension until after 1 January 2015? Still be assessed as a couple; however The member of the couple receiving the Age Pension prior to 1 January 2015 will not have their account based pension deemed, whilst the other will have their account based pension deemed. 11 Deeming considerations For those with an account-based pension and in receipt of an Age Pension: Consideration to a reversionary nomination For those eligible for the Age Pension and considering an account-based pension: Consider establishing an account based pension and applying for the Age Pension before 1 January

7 Other Age Pension Announcements Proposed Changes: Increase qualifying age to 70 years From 1 July 2025, qualifying age will continue to rise by 6 months every 2 years - Qualifying age will increase from 67 (in 2025) to 70 (in 2035) Changes to indexation of payments Commences September 2017 Eligibility thresholds will be frozen for a period of three years from 1 July Commonwealth Seniors Health Card The Commonwealth Seniors Health card is available to self-funded retirees. Eligibility is based on adjusted taxable income (ATI)* single ATI less than $51,500 p.a. couples ATI less than $82,400 p.a. The card provides concessions for: Pharmaceutical Benefits Scheme (PBS) and other medical services *ATI = taxable income + foreign income + net investment losses + reportable super contributions + reportable fringe benefits 14 7

8 Commonwealth Seniors Health Card Changes: From June 2014 card holders will cease to receive the Seniors Supplement From September 2014 the annual indexation of income thresholds will be by the Consumer Price Index (CPI) From 1 January 2015 untaxed superannuation income to be included in the eligibility assessment 1 January 2015 deeming rules will apply Not yet legislated 15 Non-Concessional Contribution caps 2014/15 Non-concessional (after-tax) contribution limits Age Under age 65 Age 65 to under 75 Age 75+ Limit $180,000 p.a. or $540,000 over 3 years $180,000 p.a. subject to a work test* Not available Tax on excess contributions 49% * Work for at least 40 hours during a consecutive 30-day period each financial year in which the contributions are made. Unpaid work does not meet the definition of gainfully employed. * Plus potential interest charge 16 8

9 UniSuper Advice UniSuper offers 3 levels of advice: General Advice (phone-based) - Not specific to your personal situation Limited Advice (phone-based) - Single issue personal advice specific to your situation Comprehensive Personal Advice (face to face) - Full personal advice covering multiple issues specific to your situation 17 Areas of Advice Flexi Pension longevity Portfolio construction Estate planning considerations Non-superannuation investments Legislative changes Age Pension considerations and more

10 Why UniSuper Advice? Fee for service All advisers are salaried All commissions are rebated to the client Advice Fee can be debited directly from a member s Flexi Pension or accumulation account, so long as the advice relates to superannuation and or superannuation related retirement planning UniSuper Advice is a Financial Planning Association (FPA) Professional Practice 19 Why UniSuper Advice? 95% of UniSuper Comprehensive Advisers are internationally recognised CERTIFIED FINANCIAL PLANNER (CFP ) professionals Call UniSuper Advice today on for a complimentary initial assessment on the level of advice that might suit you CFP, CERTIFIED FINANCIAL PLANNER and are certification marks owned outside the U.S. by Financial Planning Standards Board Ltd. Financial Planning Association of Australia Limited is the marks licensing authority for the CFP Marks in Australia, through agreement with FPSB

11 Investments Update John Pearce Chief Investment Officer Pension Seminar October 2014 We will be commenting on market trends and historical returns. Past events are not an indicator of future events. This is not advice and does not take into account your circumstances. Before making decisions about your superannuation, read our PDS (available on our website) and consider your own circumstances and whether to seek financial advice

12 Agenda 1. Global economy; doing ok but big regional differences 2. Key risks to rising markets 3. Another era of Financial Repression 4. To annuitize or not to annuitize? 5. Option Performance Global growth has been running at around trend since the GFC, with strong emerging economies offsetting weak advanced economies World GDP Growth Real GDP since December ann % ch Index (Dec 07 = 100) World GDP Long Run average 90 Dec-07 Dec-09 Dec-11 Dec-13 Global Adv EM Source: Bloomberg. Past performance is not an indicator of future performance

13 In general, share markets have recovered in line with GDP although disparities exist; Emerging market equities (and Australia) have lagged despite relatively stronger economies Equity markets vs. GDP Equity markets since pre-gfc peak 120 Index (Oct 07 = 100) Jan-07 Jan-09 Jan-11 Jan Index (Oct 07 = 100) Oct-07 Oct-09 Oct-11 Oct-13 World GDP World Equities World Advanced Emerging Australia Source: Bloomberg. Past performance is not an indicator of future performance. 25 Key risks to a rising market China slowing; short term negative but medium term positive Over-valuation; Equities are about fair value relative to history, but cheap relative to bonds Fed Tightening? Geo-Political? 26 13

14 The US Federal Reserve assures us that higher rates are a considerable time off. But... % 5 4 Federal funds target rate Rates can stay low for a considerable period Fed Dec 03 statement Equity returns have usually been positive in the year after the first hike as it takes time to slow the economy Source: Macquarie Research, FactSet, May Past performance is not an indicator of future performance

15 S&P 500 index around military invasions and conflicts ( ) Source: Bloomberg. April Equity index represents price returns. Past performance is not an indicator of future performance. 29 S&P 500 index around military invasions and conflicts ( today) Source: Bloomberg. April Equity index represents price returns. Past performance is not an indicator of future performance. Note: it is not possible to invest directly in an index

16 War zone countries as a percentage of total world: Population 11.7% Oil production 9.0% Foreign direct investment 3.8% GDP 3.0% Trade 2.6% Gross capital formation 2.4% Corporate profits 0.8% Equity market capitalisation 0.7% Interbank claims 0.5% Portfolio investment inflows 0.4% Sources: IMF, United Nations, BP, MSCI, Bloomberg, BIS, World Bank, WTO, JP Morgan 31 Australian share market returns over the last century Return in excess of inflation has been achieved despite massive market dislocations created by wars, natural disasters and asset bubbles DECADE ENDING DECADE RETURN % P.A. AFTER INFLATION Average 7.4 * Calculated from Credit Suisse Investment Returns Source Book, MSCI and ABS data. Past performance is not an indicator of future performance

17 Another era of financial repression Another age of debt WWI debts Second Great Contraction Advanced economies Gross debt as % of GDP WWI and Depression debts Source: The Liquidation of Government Debt, Reinhart and Sbrancia,

18 Dealing with debt Default Works, but is messy Austerity Doesn t actually work Inflation (Financial Repression) Inflating revenues faster than interest costs actually works, but there are winners and losers 35 Financial repression Nominal interest rates are capped below the rate of inflation i.e. negative real interest rates Encourages investment required for economic growth and capital formation Facilitates deleveraging as nominal income grows faster than debt 36 18

19 never before was so little paid to so many Adapted by Churchill UK base rates lowest since 1694 G7 plus Switzerland and Spain lowest since 1855 Netherlands base lowest since 1517 US base rates lowest since The great repression Switzerland Denmark Finland Netherlands Belgium Ireland France Germany Austria Developed countries with negative 2-year bond yields 38 19

20 The great repression Australia Iceland Greece New Zealand Portugal In 2007, 23 out of 25 developed countries had 10-year yields above 3%. Today 39 Financial Repression in action Consider the experience of a retail investor in a very large ($130 billion) US cash fund The fund primarily invests in short-dated US government obligations $10,000 invested on 1 July 2008 would have grown to $10,193 by 30 June 2014 The inflation adjusted value of the original $10,000 is $10,881 over the same period The investor has lost more than 6% of their purchasing power This is akin to the government borrowing $100 in 2008 and repaying $94.00 in 2014 It is a wealth transfer from saver to borrower 40 20

21 Australia s milder version of repression 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Consumer Price Inflation (Year-on-year) Retail Bank 3mth term deposit rate GST Introduced 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% -2% Dec-1981 Dec-1982 Dec-1983 Dec-1984 Dec-1985 Source: RBA, Bloomberg Dec-1986 Dec-1987 Dec-1988 Dec-1989 Dec-1990 Dec-1991 Dec-1992 Dec-1993 Dec-1994 Dec-1995 Dec-1996 Dec-1997 Dec-1998 Dec-1999 Dec-2000 Dec-2001 Dec-2002 Dec-2003 Dec-2004 Dec-2005 Dec-2006 Dec-2007 Dec-2008 Dec-2009 Dec-2010 Dec-2011 Dec-2012 Dec % 41 How long can it last? A long time Most countries have barely made headway in reducing their debt burdens. Demographics are putting further strain on the fiscal outlooks If history is any guide, financial repression episodes can persist for many years or decades. In the post war years to 1980 in Australia:» 81% of the time real interest rates were lower than 2%» 48% of the time real rates were negative Post-war 10-year US government yields stayed below 4% until the early 1960s 42 21

22 To annuitize or not to annuitize? Lifetime annuity An annuity is a financial product that provides a regular sum of money for a pre-determined length of time They can starting either immediately or in the future (deferred) Lifetime annuities are (not surprisingly!) paid until the death of the policyholder(s) 44 22

23 Why aren t lifetime annuities popular in Australia? Reasons typically given: We are said to have an equity culture (manifesting in the popularity of flexi-pensions) Annuities are not compulsory/incentivised as in many other countries Members don t like the lack of flexibility and access Some may see the aged pension as effectively providing annuity protection Or is it simply the case that they are too expensive? 45 Instead of buying an annuity one could invest in a portfolio of shares 10.0% Return from Australian shares (ASX 100 Industrials) 9.0% 8.0% Dividend Yield 7.0% 6.0% 5.0% 4.0% Average dividend yield was 4.5% net or 5.7% gross of franking credits 3.0% 2.0% 1.0% 0.0% Past performance is not an indicator of future performance. Dividend Yield 46 23

24 Instead of buying an annuity one could invest in a portfolio of shares Return from Australian shares (ASX 100 Industrials) 10.0% 35 Dividend Yield 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% Dividend yield was 5% in Percentage of initial capital paid each year 0.0% Dividend Yield Dividend received each year if $100 was invested in 1985 Past performance is not an indicator of future performance. 47 Instead of buying an annuity one could invest in a portfolio of shares Return from Australian shares (ASX 100 Industrials) 10.0% 35 Dividend Yield 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% Dividends have grown by around 6% p.a. since Percentage of initial capital paid each year 0.0% Dividend Yield Dividend received each year if $100 was invested in 1985 Past performance is not an indicator of future performance

25 Instead of buying an annuity one could invest in a portfolio of unlisted property Return from Australian unlisted (ungeared) property 10.0% 9.0% 8.0% Average rental yield is 7.5% 7.0% Rental Yield 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Rental Yield Past performance is not an indicator of future performance. 49 Instead of buying an annuity one could invest in a portfolio of unlisted property Rental Yield 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% Return from Australian unlisted (ungeared) property Rental yield was 7.5% in 1985 Average rental yield is 7.5% Percentage of initial capital paid each year 0.0% Rental Yield Rents received each year if $100 was invested in 1985 Past performance is not an indicator of future performance

26 Instead of buying an annuity one could invest in a portfolio of unlisted property Return from Australian unlisted (ungeared) property Rental Yield 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Rental income has grown by around 3% p.a. since 1985 Average rental yield is 7.5% Percentage of initial capital paid each year Rental Yield Rents received each year if $100 was invested in 1985 Past performance is not an indicator of future performance. 51 What would have happened from 1985? Percentage of initial capital paid each year Purchasing an annuity in 1985 relative to buying a share or property portfolio Dividend stream from equities Rental stream from property Proceeds from an annuity commencing in 1985 The initial annuity value was calculated using the IM80 life tables, with assumptions relating to mortality improvement. The investment return assumption was set to 13.2% and an inflation assumption of 6% was used. Past performance is not an indicator of future performance

27 Lifetime annuity The collapse in bond yields significantly increases the cost of annuities UniSuper s Commercial Rates Indexed Pension currently provide a 65 year old $58,128 * p.a. for a $1.27 million investment ASFA June 2014 Retirement Standard for a couple s comfortable lifestyle Past performance is not an indicator of future performance. 53 Comparison of capital levels required to finance $58,128 p.a. * YEAR RATE OF INCREASE ANNUITY PRICE INFLATION ($M) ASX 100 INDUSTRIAL EQUITY PORTFOLIO DIVIDEND GROWTH RATES ($M) UNLISTED DIRECT PROPERTY PORTFOLIO RENTAL GROWTH RATES ($M) Now more expensive than relying on dividends from an equity portfolio But note that dividends can (and often do) fall in value Annuity values were calculated using the IM80 life tables, with assumptions relating to mortality improvement. The investment return assumption was set to the long bond yield and inflation assumption was based on break even inflation expectations at the time (but approximated in 1985 due to a lack of historical data) 54 27

28 What happens on death of the retiree? Value of portfolio on death share portfolio growing at 6% p.a. share portfolio growing at 3% p.a. share portfolio growing at 0% p.a. Value of annuity with a 10 year guarantee Millions Years after retirement 55 Summary The main benefit of Annuities is that they perfectly match one s lifespan and hedge the annuitant from the risk of rising price inflation However, as a consequence of the GFC, in the era of financial repression, bond yields have been driven to historically low levels The consequence of a fall in bond yields (and increasing life expectancy) is that annuities are now very expensive relative to other assets; for example» A share portfolio of Industrial stocks now delivers an initial dividend yield of 6.5%, which is higher than the total return that a 65 year old can obtain from a life annuity with inflation protection» The current income yield on the Australian listed property sector 4.6% (which is about the same as total return for annuities) However, capital values of shares and property can fluctuate, sometimes dramatically; the appropriateness of any investment strategy depends on one s risk tolerance

29 Yield oriented investment options Low risk High risk 57 In search of yield Australian Equity Income Option Option Objectives Provide income yield greater than ASX300 (currently 4.5% for 2014)» note that franking credits can increase income yield by an additional 1.5% Provide capital growth potential Suitable for Risks Investors who want equity exposure with a preference for blue-chip, high yielding equities, as distinct from general equity market exposure which includes higher risk/higher growth companies Investors able to benefit from franking credits (i.e. superannuation funds) Volatility associated with equity markets, which can result in large fluctuations in capital values Investment time horizon has to be long term (i.e. five years or longer) 58 29

30 In search of yield Australian Equity Income Option Australian Equity Income vs. ASX300 (Cumulative Returns) Top 10 Holdings STOCK NAME PORTFOLIO WEIGHT (%) DIV YIELD (NET %) DIV YIELD (GROSS %) CBA TELSTRA Index Value WESTPAC TRANSURBAN ANZ WOODSIDE NAB Apr 2012 Jul 2012 Oct 2012 Jan 2013 Apr 2013 Jul 2013 Oct 2013 Jan 2014 Apr 2014 Jul 2014 WOOLWORTHS IAG Aust Equity Income (After Tax and Fees) ASX 300 (After tax and Fees) WESFARMERS Source: Net and Gross dividend yields sourced from Goldman Sachs 1year forward yield data 59 Example of a key AEI holding: Woolworths Consistent earnings and dividends what GFC? Woolworths Share Price vs. Dividend per Share $40 $2.00 $35 $1.80 $30 $1.60 $1.40 Share Price $25 $20 $15 $10 $1.20 $1.00 $0.80 $0.60 $0.40 Dividend Per Share $5 $0.20 $ FY End DPS Price $

31 CBA shares ($) ($) Dividend Per Share (RHS) Share Price (LHS) 61 Option performance 31

32 Option performance as at 30 September 2014 OPTION FYTD (%) 1 YEAR (%) 3 YEARS (% pa) 5 YEARS (% pa) 7 YEARS (% pa) High Growth Balanced Cash DBD OPTION FYTD (%) 1 YEAR (%) SINCE INCEPTION (21 APRIL 2012) Australian Equities Income Global Companies in Asia Global Environmental Opportunities Diversified Credit Option Inception 1 September 2014 Past performance is not an indicator of future performance. Returns relate to our pension (not accumulation) options and are calculated after fund taxes and investment expenses, but before account based fees. 63 Funding status of the 100 largest US corporate DB plans % % 55% 35% 15% -5% 1/11/2009 1/01/2010 1/03/2010 1/05/2010 1/07/2010 1/09/2010 1/11/2010 1/01/2011 1/03/2011 1/05/2011 1/07/2011 Solvency of the Defined Benefit plans Cumulative stock market return 1/09/2011 1/11/2011 1/01/2012 1/03/2012 1/05/2012 1/07/2012 1/09/2012 1/11/2012 1/01/2013 1/03/2013 1/05/2013 1/07/2013 1/09/2013 1/11/2013 1/01/2014 1/03/ Largest US Corporate DB Plans US Stock Market Source: Milliman Pension Funding Index,

33 Funding status of the 100 largest US corporate DB plans % % 55% 35% 15% -5% 1/11/2009 1/01/2010 1/03/2010 1/05/2010 1/07/2010 1/09/2010 1/11/2010 1/01/2011 1/03/2011 1/05/2011 1/07/2011 1/09/2011 1/11/2011 1/01/2012 1/03/2012 1/05/2012 1/07/2012 1/09/2012 1/11/2012 1/01/2013 1/03/2013 1/05/2013 1/07/2013 1/09/2013 1/11/2013 Solvency of the Defined Benefit plans 1/01/2014 Cumulative stock market return 1/03/ Largest US Corporate DB Plans US Stock Market Australian Stock Market 65 Funding status of the 100 largest corporate DB plans % Solvency of the Defined Benefit plans % 55% 35% 15% -5% 1/11/2009 1/01/2010 1/03/2010 1/05/2010 1/07/2010 1/09/2010 1/11/2010 1/01/2011 Cumulative stock market return 1/03/2011 1/05/2011 1/07/2011 1/09/2011 1/11/2011 1/01/2012 1/03/2012 1/05/2012 1/07/2012 1/09/2012 1/11/2012 1/01/2013 1/03/2013 1/05/2013 1/07/2013 1/09/2013 1/11/2013 1/01/2014 1/03/ Largest US Corporate DB Plans UniSuper's DBD US Stock Market Australian Stock Market 66 33

34 Relative performance to 30 September 2014 Option 1 Year 3 Years 5 Years 10 Years High Growth Q1 Q2 Q1 Q1 Growth Q1 Q1 Q1 Q1 Balanced Q1 Q1 Q1 Q1 Conservative Balanced Q1 Q1 Q1 Q1 Capital Stable Q1 Q1 Q1 Q1 Cash Q2 Q2 Q2 Q1 Australian Shares Q1 Q1 Q2 n.a International Shares Q1 Q1 Q1 n.a Past performance is not an indicator of future performance. Rankings relate to our pension (not accumulation) options based on the Super Ratings survey for the period ended 30 September 2014 as published on 21 October