Report to members. for the year ended 30 June Electricity Industry Superannuation Scheme

Transcription

1 Electricity Industry Superannuation Scheme Report to members for the year ended 30 June 2002 Issued by the Electricity Industry Superannuation Scheme ABN

2 Dear Member 2 I am pleased to present the Board s 2002 annual report to members. The 2001/2002 financial year was a tough period for all investors. This was due to the global slowing economy, declining company profitability, the September 11 terrorist attacks and concerns about the quality of some US firms financial reporting. All these factors affected investor confidence and drove most share markets down over the year. Given these difficult investment conditions, it is not surprising that the Growth Portfolio has produced a negative investment return refer pages 7 & 8 for details. If you have an accumulation style superannuation account then the value of your account may have fallen. Seeing the value of your superannuation fall can be unnerving, but bear in mind that it is perfectly normal for investment markets to move up in some years and down in others. This is the first time in 14 years that many super fund members will have seen negative returns. Your superannuation is a long-term investment and it s important you focus on the long-term returns achieved by your Scheme. During the year, the Board altered the Scheme s operation so that it can now accept additional voluntary contribution at any multiple of 1½% of salary. These contributions do not give any extra employer subsidy, but allow members to give their super a boost by providing a way for members to save in a tax efficient manner with low fees. Salary sacrifice is available where your employment arrangement so allows. While the new additional voluntary contributions do not generate any extra employer subsidy, payment of contributions under the normal flexible contribution system gives extra employer subsidy until you have reached a 6% average contribution level (or a level between 5% and 6% in the Pension Scheme). During the year, the Board wrote to Scheme members who have not reached the 6% average to remind them of their contribution options. As a result, many of these members increased their contribution levels to put themselves on track to achieve the maximum employer subsidy. The year saw the resolution of the long-standing matter of the Scheme becoming taxed in the same way as all private-sector funds. The Commonwealth Parliament passed legislation to impose a special rollover tax, payable when a superannuation fund changes from being untaxed to being taxed, and then removed the Scheme s tax protection. Following that, the State Treasury amended the Scheme Rules to reduce gross benefits in a way which ensures that all members benefits after tax will be at least as high as they would have been had the Scheme continued being untaxed. The year also saw the retirement of the previous Chairman, Max Bray, after seven years in that position. His fellow Board members have expressed their appreciation of his guidance over that period. Since becoming Chairman, I have established a Board Investment Committee to handle the detail of the investment arrangements, and a Board Governance Committee to ensure that all aspects of Scheme governance are in place for the security of your benefits. I look forward to a continuing association with the Scheme as it passes through the considerable changes which are taking place in the world of superannuation. Foremost of these changes are the Scheme coming under the Commonwealth s prudential regulations maintained by APRA (expected at the end of this financial year) and also moves by the Commonwealth Government to enhance the security of superannuation in general. Protecting your benefits is the primary aim of the Superannuation Board and the whole Board takes this responsibility very seriously. However, as recent events have shown, we are all subject to the risks of investment markets. I would like to express my appreciation of the work of Board members, in particular to Lorraine Baker and Bob Stobbe who retired from the Board on 30 November Mark Day Chairman Electricity Industry Superannuation Board

3 Who Runs the Scheme The Superannuation Board Specialist Advisers The Scheme is run by a Statutory Board, namely the Electricity Industry Superannuation Board. The current Board Members are: The Board obtains specialist help and advice to help run the Scheme effectively and efficiently. Service providers to the Board include: Independent Chairman Actuary & Administrator: Mark Day Mercer Human Resource Consulting Pty Ltd Appointed by the Employers Investment Adviser: Jenny Scarman (NRG Flinders) alternate Mark Williamson Neil Young (Terra Gas Trader) Bob Stobbe (ETSA Utilities) until 30 November 2002 Patrick Makinson (ETSA Utilities) from 1 December 2002 JANA Investment Advisers Pty Ltd appointed September 2002 Appointed by the Government Taxation Adviser: John Barrett KPMG Appointed by the United Trades & Labor Council of SA Auditor: Medical Adviser: Dr Roger Murphy KPMG John Fleetwood alternate John Cunningham Bob Geraghty alternate Bob Donnelly Elected by members Lorraine Baker until 30 November 2002 Eric Lindner Wendy Roxbee from 1 December 2002 Eric Lindner and Wendy Roxbee have been elected for a three-year term from 1 December Mark Day, Chairman of the Board 3

4 About the Scheme Divisions of the Scheme Scheme members belong to one of five sub-schemes. The Lump Sum Scheme (Division 2) provides mixed accumulation and defined benefits. Members receive their own contributions, accumulated with interest, plus an employer-financed lump sum, plus an additional occupational benefit. The Pension Scheme (Division 3) provides pensions based on final salary and then indexed with CPI. However some benefits, such as the benefits on voluntary separation and retrenchment, are based on 3½ times the member s contributions with interest, plus an additional occupational benefit. Provident Account A (also part of Division 3) provides lump sum benefits for those who were not able to be accepted into the Pension Scheme when that Scheme was open to new members. The RG Scheme (Division 4) provides lump sum benefits based on the member s contributions accumulated with interest, plus the lesser of 2 1 / 3 rd times this accumulation and a salary-based figure, plus an additional occupational benefit. The Accumulation Scheme (Division 5) is the only division open to new members. It provides benefits based on contributions plus investment earnings. Employer contributions are at least at the Superannuation Guarantee level. Members can make additional voluntary contributions and can choose the level of their insurance cover. Contributions can be made for and by spouses. Proportion of employed members in each Division: Members Contributions The level of member contributions is flexible. You generally can choose any multiple of 1½% of salary, or you may temporarily stop contributing. Full benefits from Divisions 2, 3 and 4 are achieved by contributing, on average, your standard contribution rate. This is, generally, 6% of salary, but can be between 5% and 6% in the Pension Scheme. Contributions are deducted from your salary each pay day. The Scheme is able to accept member contributions on a pre-tax (ie. salary-sacrifice) basis. These contributions are made from your salary before income tax is paid. However, not all employment arrangements allow salarysacrifice please check with your employer. Contributions can also be made for your spouse. Scheme Membership The number of employees in the Scheme was 2,098 as at 30 June There are eight different employer groups involved. The employer with the largest number of employees is ETSA Utilities, which accounts for 55% of the employed members. During the year 125 new members were admitted to the Accumulation Scheme, which is the only Scheme open to new employees. Benefits Paid During 2001/02, $9.5 million was paid out in lump sums during the year as follows: 4 RG Scheme 12% Accumulation Scheme 22% Pension Scheme 19% Provident Account A 1% Lump Sum Scheme 46% BENEFIT TYPE NO. $M AGE RETIREMENT INVALIDITY DEATH RESIGNATION, VOLUNTARY SEPARATION, RETRENCHMENT, ETC TOTAL By way of comparison, during the 2000/2001 year 119 members were paid lump sums totalling $16.2 million.

5 How the Benefits are now Financed Members have always contributed to the Scheme, but public-sector employers did not make contributions until the benefits were paid. This required each benefit payment to be shared between the Scheme and the employer. With private-sector employers now involved in the Scheme, it is being funded like other private-sector corporate superannuation funds. Members and employers pay ongoing contributions into the Scheme and benefits are paid out of the Scheme assets. Both State and Commonwealth legislation requires employers to pay sufficient contributions to give security of benefits. In particular, the private-sector employers are required to catch up the lack of employer contributions in the past by making special contributions over a 5-year period, commencing from the relevant privatisation date in The payment of these special contributions is guaranteed by the State Government. Insurance Protection The Board takes out insurance against the death and invalidity of Scheme members to protect the Scheme against those risks. Also the Scheme pays for insurance to protect the Superannuation Board and the Scheme against the financial effects of any honest mistakes that might occur in the running of the Scheme. Privacy Rule Changes The Scheme Rules were amended during the year to incorporate various changes, as follows: You can now make additional voluntary contributions to the Scheme at any multiple of 1½% of salary. Where a benefit payment is delayed, interest is now paid as from the date the payment was due, rather than only from one month after that date. Public sector employers are required to fully fund Scheme benefits for their employees. Scheme assets are now owned by the Superannuation Board rather than the Treasurer. An employer can, by notifying the Superannuation Board, allow its employees in Divisions 2, 3 and 4 to elect to transfer to Division 5. Gross benefits have been reduced to allow for the Scheme becoming taxed, while maintaining after-tax benefits no less than those which would have been received under the old arrangements. Taxation The Commonwealth Government made a regulation on 29 May 2002 which removed the constitutional protection of the Scheme and made the Scheme taxed with effect from 1 July Tax paid in June 2002 for the year ended 30 June 2001 included a special payment of $6,225,600 to cover the transition of the Scheme from untaxed to taxed. The payment of this tax is counter-balanced by the tax reductions to gross benefits. Your privacy has always been important to the Board. Now the Scheme also complies with amendments to Commonwealth Privacy legislation that took effect in December The Scheme holds personal information about you, such as your name, address, date of birth, salary, tax file number and so on in order to provide your super benefits. This personal information may be disclosed, as necessary, to the Scheme Administrator and professional advisers, insurers, Government bodies, employers and other parties. The Board has adopted a Privacy Policy that sets out in more detail the way your personal information is handled. If you would like a copy of the Privacy Policy please contact the Scheme s Privacy Officer on (08) or fax (08) or eiss@mercer.com. 5

6 The Scheme s Investment Investment Policies The Superannuation Board aims to secure the best return from the investment of the Scheme assets, within an acceptable level of risk. The benefits affected by the investment return are those which incorporate member and/or employer contributions accumulated with interest. The Board sets investment objectives and a strategy with a long-term view in mind. Superannuation is a long-term savings plan for your retirement. The Board employs a number of experts to manage its investments. Each one is chosen to be a specialist in the relevant investment sectors, for example Australian shares. Full details of the policies, objectives and strategies are contained in the Board s annual report to the Treasurer, available upon request to the Secretary. Your Investment Choice The investment strategy involves a significant use of growth assets (shares and property) whose value varies with investment markets. This means that there can be significant variations from time to time in some of the benefits provided. Negative returns can occur. The use of growth assets should be appropriate for those remaining in service for some time, in order that they have a prospect of better returns. However it may not suit those who expect to leave in the short term and who wish to protect their benefits against loss caused through fluctuating investment markets. Members of the Lump Sum Scheme, the RG Scheme and the Accumulation Scheme can choose to have: their own contributions invested across all investment sectors, with a bias towards growth assets (called the Growth Portfolio ), or to choose protection by having their contributions invested only in cash investments (called the Cash Portfolio ). As at the end of the year 39 members had exercised the choice to invest in the Cash Portfolio. The amount invested in this Portfolio was $2.4 million. The remaining members and money were in the Growth Portfolio. Because of its salary-linked benefit design, investment choice is not applicable to the Pension Scheme. Nor does it apply to Provident Account A. Investment Managers The Board currently uses the following managed investment funds, each of which is invested in a particular investment sector. The figures shown are the percentages of total investments invested in each fund as at 30 June Australian Shares: Credit Suisse Australian Shares Fund 15% Rothschild Australian Shares Wholesale Trust 17% State Street Global Advisors Australian Active Equity Trust 17% Overseas Shares: Credit Suisse International Shares Fund 12% Lazard Global Equity (ex-australia) Trust 12% Bonds: PIMCO Diversified Fixed Interest Trust 23% Loy Yang Bond 1% Cash: Deposit at Treasury 3% 100% Under investment choice, these members can switch their investments at the end of each quarter (31 March, 30 June, 30 September and 31 December) by giving the Superannuation Administrator at least one week s written notice. 6

7 Asset Allocation % 48.4% The following chart shows the benchmark allocation of the Growth Portfolio to the various investment sectors, as well as the actual asset allocation at the end of the year Australian Shares 25.0% 21.9% Overseas Shares 25.0% Bonds 28.0% 0.0% Cash 1.7% Benchmark Actual Earnings Credited The investment earnings credited in the Scheme is important to members. It effects the size of most benefits in the Lump Sum Scheme, the RG Scheme and the Accumulation Scheme. It also affect the size of the cash resignation and the VSP/ retrenchment benefits in the Pension Scheme and all benefits from Provident Account A. The earning rates credited for the year ended 30 June 2002 and average rates credited over the last 5 years are: 2001/ year average Lump Sum & RG Schemes Growth Portfolio -7.9% 5.7% pa Lump Sum & RG Schemes Cash Portfolio 4.2% 4.8% pa Accumulation Scheme Growth Portfolio -7.7% 2.6% pa Accumulation Scheme Cash Portfolio 4.2% 5.2% pa Pension Scheme & Provident Account A -5.5% 8.5% pa In the Lump Sum and RG Schemes, the full investment earnings (net of costs) is credited to members according to whether the Growth Portfolio or the Cash Portfolio has been chosen. Returns from the Growth Portfolio can be positive or negative. Returns from the Cash Portfolio are expected to always be positive. The crediting rates for the Accumulation Scheme are derived from the same portfolio returns as the Lump Sum and RG Scheme, but slightly higher rates apply as they are not reduced by costs the Employers pay all the costs of the Accumulation Scheme. The past history of crediting rates in the Accumulation Scheme is affected by the arrangement which applied prior to 1 July 2000 under which the crediting rate was linked to yields available on long-term South Australian Financing Authority Bonds. In the Pension Scheme and Provident Account A, the crediting rate was able to be kept at 12% or above, of recent years. This was possible because there was an investment fluctuation reserve which (while it lasted) could cushion falls in investment earnings. This reserve was sufficient to support a 12.0% crediting rate for the 2000/01 year, but the reserve was exhausted by August 2001 on account of negative returns experienced since 1 July Thus from August 2001 onwards, the crediting rate for the Pension Scheme and for Provident Account A follow actual investment earnings of the Growth Portfolio, net of costs. Interim crediting rates are used for the current year when benefits are paid. 7

8 The Scheme s Investment continued... Investment Performance The investment strategy has various objectives against which the Growth Portfolio s investment performance is measured. The objectives and the results are as follows: Objective 1: Objective 2: negative returns from investment markets causing a low return relative to CPI; a higher allocation to shares than the median balance fund manager; 8 Objective 1: Exceed the Consumer Price Index by 5% pa over rolling 5-year periods. Result: Over last five years Growth Portfolio Inflation-linked objective 7.5% pa 7.7% pa Objective 2: Exceed median return in the Mercer surveys of balanced funds over rolling 3-year periods. Result: Over last three years Growth Portfolio Survey objective 3.2% pa 4.4% pa Objective 3: Exceed indexed benchmark portfolio over rolling 3-year periods. Result: Over last three year Growth Portfolio 3.2% pa Indexed objective 3.5% pa The following table shows that in most periods ending in prior years the investment objectives have been met. Objectives met for periods ended: 30/6/ Objective 1 Objective 2 Objective 3 na na The Board s Investment Newsletter of October 2002 provides detail on the investment performance over 2001/02. In summary, the investment objectives have not been met for periods ending 30 June 2002 because of - Objective 3: weak performance relative to benchmark by two of the Scheme s three Australian shares managers. The 2001/2002 investment environment in more detail Australian shares - down 4.5% (S&P/ASX 300 Accumulation Index) The poor performance of News Corporation (down almost 50%) detracted 5.4% from the index return. Other shares that significantly reduced market returns included AMP, Telstra and QBE. Overall, poor performing sectors included Healthcare, Information Technology and Telecommunications. On the positive side, Financials (due to the defensive nature of the sector) and Materials (the continuing housing boom supporting building material related companies and the strengthening gold price) were strong performers. Overseas shares - down 23.5% (MSCI World ex Australia (in $A) Index) All major MSCI country indices were down over the period by at least 10% in local currency terms. The US market fell 19.6% but European and Asian markets were also hit hard with Germany down 25.7%, France down 21.8%, Japan down 20% and the UK down 14.1%. Australian fixed Interest - Up 6.2% (UBS Warburg Composite Bond Index) Yields of most fixed interest securities fell, leading to price increases, especially on longer duration bonds. The decline in fixed interest yields reflects the difficult economic environment. Overseas fixed interest - Up 8.0% (Salomon Brothers World (ex Australia) Government Bond (Hedged in $A) Index) Yields of most bonds fell, leading to price increases, especially on longer duration bonds. The decline in bond yields reflected the easing of official interest rates designed to offset the increasingly difficult post September 11 economic environment.

9 Financial Details The tables on page 10 summarise the Scheme s main financial transactions for the year ended 30 June The audit of the Scheme accounts has been completed and no qualifications were imposed by the auditor. Employer Contributions There are seven private-sector employer groups participating in the Scheme. The Scheme also involves public sector employers employing members who have been transferred to public sector employment and who exercised their right to remain Scheme members. All employers are making contributions to fund their liabilities in accordance with the advice of the independent actuary. All employer contributions for the year have been paid. Administration Costs In setting the interest rates used to credit interest to members contributions each year, all costs of investing are deducted from the gross investment returns. For the Lump Sum Scheme, the Pension Scheme, Provident Account A and the RG Scheme, 30% of all other costs of running the Scheme are also deducted from the investment returns. No direct deductions are made from any members accounts or benefits for administration costs. The employers contributions cover the balance of the administration costs. This includes all administration costs for the Accumulation Scheme. Surcharge Tax Surcharge is the additional tax at up to 15% on employer support for benefits, and also member pre-tax contributions, that apply to high income earners. The surcharge tax applies if your adjusted taxable income exceeds $90,527 in the 2002/2003 financial year. This figure increases each year in line with increases in average earnings. Adjusted taxable income includes taxable income, employer superannuation contributions and certain fringe benefits. Surcharge tax also automatically applies to you if you have not provided your Tax File Number to your Scheme, irrespective of what you earn. As is the case with all other private sector funds, if surcharge tax applies to you, it is charged to an account in your name in the Scheme. Ultimately, you will be responsible for paying any surcharge tax. Your surcharge account will be deducted from your benefits when you leave the Scheme. No surcharge assessments have however yet been received by the Scheme, even though members became subject to surcharge from We expect that the Tax Office will soon be issuing assessments for those earlier years. 9

10 Change in net assets over the year Lump Sum Pension RG Accumulation Net market value of assets available to pay benefits as at 1 July 2001 $51.8m $81.6m $31.6m $2.5m PLUS Income: Member contributions $2.3m $1.6m $0.8m $0.7m Employer contributions $22.3m $21.5m $9.7m $2.4m Net investment income ($4.2m) ($7.1m) ($2.5m) ($0.2m) TOTAL $20.4m $16.0m $8.0m $2.9m LESS Expenditure: Benefits paid, etc $2.5m $6.0m $0.9m $0.1m Other expenses including tax and insurance $3.2m $5.8m $1.6m $0.2m TOTAL $5.7m $11.8m $2.5m $0.3m Net market value of assets available to pay benefits as at 30 June 2002 $66.5m $85.8m $37.1m $5.1m Statement of net assets as at 30 June 2002 Assets: Lump Sum Pension RG Accumulation Investments $62.3m $87.5m $35.7m $4.0m Other assets $7.8m $4.5m $3.0m $1.3m TOTAL $70.1m $92.0m $38.7m $5.3m LESS Current Liabilities: Benefits payable $0.5m Other liabilities $3.1m $6.2m $1.6m $0.2m TOTAL $3.6m $6.2m $1.6m $0.2m Accumulated funds as at 30 June 2002 $66.5m $85.8m $37.1m $5.1m 10

11 Keeping You Informed If you have a problem Most queries can be sorted out over the phone call the Superannuation Administrator on (08) A verbal response will be given within 2 working days. If you are not satisfied with the verbal response, you can make a written complaint addressed to:- The Secretary Electricity Industry Superannuation Scheme Level North Terrace ADELAIDE SA 5000 The Board will examine all written complaints within 5 weeks of receipt and make a decision within 90 days. Information available Current information available to members includes: Annual Member Statements Member s Booklet You are also entitled to access the Scheme Rules, the Annual Report to the Treasurer (which includes the full statistics, financial statements and the auditor s reports), the actuary s reports, the investment policy statement, and details of how the Board members are elected. These can be viewed by contacting the Superannuation Administration. Information Sheets and brochures are available on a number of subjects, including: Change of Employer Additional Voluntary Contributions Paying Additional Voluntary Contributions Pre-tax Pre-Tax Superannuation Contributions (Salary Sacrifice) Your Investment Choice Spouse Superannuation The Board also issues newsletter to keep members up-to-date. If you would like a copy of any of these documents, or need more information about the Scheme or your benefits, the Superannuation Administrator will be able to help you. Contact details are: Tel (08) Fax (08) eiss@mercer.com Or contact the Secretary of the Board: C/- Mercer Human Resource Consulting Pty Ltd 108 North Terrace ADELAIDE SA 5000 Tel (08) Fax (08) eiss@mercer.com 11

12 12 Issued by the Electricity Industry Superannuation Board November 2002