Heritage Bank Limited Superannuation Plan

Transcription

1 Consulting (Australia) Pty Ltd ABN AFS Licence # Exhibition Street Melbourne Vic 3000 GPO Box 9946 Melbourne Vic Fax julie.a.cook@mercer.com 5 April 2012 Heritage Bank Limited Superannuation Plan A sub-plan of Spectrum Super Statement of Advice Report to the Trustee on the Actuarial Investigation as at 30 June 2011

2 Contents Executive Summary Key results and recommendations Purpose Financial position as at 30 June Financing objective adopted for investigation Main items of Plan experience Recommended contribution rates Projection of coverage of accrued benefit liabilities Key risks Illustration of potential investment volatility Other statements and recommendations Additional information Action required Actuary s certifications Membership, Assets and Experience Membership Assets Experience Change in financial position since previous valuation Valuation methodology, assumptions and results Funding Requirements Financing the benefits Actuarial assumptions Method of calculating the Actuarial Value of Accrued Benefits Valuation results in summary Contribution requirements Investment volatility Plan Design and Policies Background information Summary of benefits Investment policy Crediting Policy Insurance SIS Statements Glossary

3 Certificates Summary of actuary s report for the purposes of Australian Accounting Standard AAS25 Funding and Solvency Certificate Throughout this report the is referred to as the Plan. Any reference to the Employer may include all employers who participate in the Plan as appropriate to the context. 2

4 Executive Summary This report on the actuarial investigation of the Plan as at 30 June 2011 has been prepared to meet the requirements of the Plan s governing rules and the SIS legislation. Experience over review period The overall experience over the review period was negative, with the adverse impact of investment returns and salary increases outweighing the favourable impact of contributions above the long term cost. Sections 1.4 and 2.3 provide further details. Financial position as at 30 June 2011 A summary of the financial position of the defined benefits section of the Plan as at 30 June 2011 is set out below: Defined Benefits $ 000s Index Asset 5,559 Vested Benefit (Early Retirement with consent from age 55) 4, % Vested Benefit (Early Retirement as a right from age 60) 3, % Actuarial Value of Accrued Benefit (PSL) 5, % Accrued Retirement Benefit 6, % *this table excludes additional balances of $981,000 for members of the defined benefit section of the Plan as at 30 June 2011 Refer to the Glossary (Section 6 of this report) for descriptions of the measures of liability shown above and Sections 1.2 and 2.2 for further comments and comparison with the position at the previous investigation date. The coverage levels at 30 June 2011 were lower than the levels projected at the previous actuarial investigation, due to the overall negative experience over the intervening three years (refer section 1.4). The Plan was in a satisfactory financial position as defined under SIS legislation and coverage levels of Vested Benefits exceeded the financing objectives. Recommended contribution rates I have recommended (in Section 1.5) that the Employer s defined benefit contributions continue at the current rates, but also requiring payment of Top-up contributions in the event of Employer consent being given to Early Retirement between age 55 and 60. The amount of Top-up contributions would be the difference between the Early Retirement Benefit and the Resignation Benefit for the individual member, grossed up for 15% contribution tax. This recommended contribution program is expected, on the basis of the actuarial assumptions adopted for this investigation, to maintain the Plan in a satisfactory position. 3

5 1 Key results and recommendations This section highlights the critical issues relating to the Plan s financial position and summarises the key findings and recommendations resulting from this investigation. 1.1 Purpose I have prepared this report exclusively for the Trustee of the Heritage Bank Limited Superannuation Plan for the following purposes: Present the results of an Actuarial Investigation of the Plan as of 30 June 2011; Review Plan experience for the period since the previous Actuarial Investigation (effective at 30 June 2008); Recommend contributions to be made by the Employer intended to allow the Plan to meet its benefit obligations in an orderly manner, and to reach and maintain an appropriate level of security for members accrued benefit entitlements; Satisfy the requirements of the Plan s Trust Deed for Actuarial Investigations of the Plan s financial position; and To meet legislative requirements under relevant Commonwealth superannuation legislation. 4

6 1.2 Financial position as at 30 June 2011 A summary of the financial position of the defined benefits section of the Plan as at 30 June 2011 is set out below: Defined Benefits $ 000s Index Asset 5,559 Vested Benefit (Early Retirement with consent from age 55) 4, % Vested Benefit (Early Retirement as a right from age 60) 3, % Actuarial Value of Accrued Benefit (PSL) 5, % Accrued Retirement Benefit 6, % *this table excludes additional balances of $981,000 for members of the defined benefit section of the Plan as at 30 June 2011 Refer to the Glossary (Section 6 of this report) for descriptions of the measures of liability shown above and Section 2.2 for comparison with the position at the previous investigation date. Vested Benefits coverage At 30 June 2011 Plan assets were greater than Vested Benefits. Accordingly the Plan was considered to be in a satisfactory financial position under SIS legislation. The 143.1% coverage of Defined Benefit Vested Benefits (Early Retire from age 60) was also above the financing objective of 105% coverage adopted for this investigation (refer Section 1.3). Two measures of Vested Benefits have been calculated, to illustrate the impact of allowing for Employer consent to early retirement benefits from age 55, compared to the position where early retirement benefits are payable as of right from age 60. SG Minimum Benefits coverage Plan assets at 30 June 2011 were also greater than SG Minimum Benefits and hence the Plan was considered to be solvent under SIS legislation. As total SG Minimum Benefits are lower than total Vested Benefits, the financing objective of 105% coverage of Defined Benefit Vested Benefits automatically provides targeted SG Minimum Benefits coverage in excess of the 100% level required for solvency. Actuarial Value of Accrued Benefits coverage The 95.7% coverage of the Actuarial Value of Accrued Defined Benefits at 30 June 2011 was below 100%. Reports on actuarial investigations under the SIS legislation are required to include the actuary s opinion as to the adequacy of assets to meet accrued benefit liabilities (the Actuarial Value of Accrued Benefits) at the investigation date and over the following three years (the required statement is included at Section 5 of this report). SIS does not specify any consequences of a negative opinion. Overall financial position The coverage levels at 30 June 2011 were lower than the levels projected at the previous actuarial investigation, due to the overall negative experience over the intervening three years (refer section 1.4). The Plan was in a satisfactory financial position as defined under SIS legislation and coverage levels of Vested exceeded the financing objectives. 5

7 1.3 Financing objective adopted for investigation The financing objective I have adopted for this investigation is to maintain the value of the Plan s assets at least equal to: 100% of accumulation account balances plus 105% of Vested Benefits (Early Retire as a right from Age 60) for defined benefit members. Accumulation account balances are matched by specific assets and do not require any additional margins. However the defined benefit liabilities are not linked to the returns on the underlying assets. A margin in excess of 100% coverage of vested defined benefits is therefore desirable to provide some security against adverse experience such as poor investment returns. It is noted that achieving the financing objective of 105% of Vested Benefits for defined benefit members would also result in a satisfactory margin of coverage over 100% of SG Minimum Benefits. Hence it is not considered necessary to adopt specific financing objectives in relation to this liability measure. 1.4 Main items of Plan experience The more significant factors affecting the Plan s financial experience during the period since the previous actuarial investigation in 30 June 2008 were as follows: Item Investment returns Salary increases Employer contributions Assumed at previous investigation Plan experience 6.5% p.a. -1.4% p.a. 5.5% p.a. year ending 30 June 2009, 4.0% p.a. thereafter Higher than expected long term cost 4.6% p.a. As recommended in subsequent advice Comment on effect Adverse effect - investment grew at a slower rate than assumed Slightly Adverse effect - benefit liabilities grew more rapidly than expected Positive effect contributions paid at a rate higher than expected long term cost The overall experience over the review period was negative, with the adverse impact of investment returns and salary increases outweighing the favourable impact of contributions above the long term cost. Section 2 provides further details of Plan membership, assets and experience. 6

8 1.5 Recommended contribution rates The recommended contribution program is to continue at the current rates, but also requiring payment of Top-up contributions in the event of Employer consent being given to Early Retirement between age 55 and 60. The amount of Top-up contributions would be the difference between the Early Retirement Benefit and the Resignation Benefit for the individual member, grossed up for 15% contribution tax. This program is summarised as follows: Defined Benefit members: 21% of salaries for all defined benefit members, plus An additional 5.9% of deemed member contributions for Category B,C, and D members, plus Top-up contributions for early retirement benefits with Employer consent, plus Any additional employer contributions agreed between the Employer and a member (e.g. additional salary sacrifice contributions). Accumulation members: 9% of Ordinary Time Earnings (or such lesser amount as required to meet the Employer s obligations under Superannuation Guarantee legislation or employment agreements), plus Any additional employer contributions agreed between the Employer and a member (e.g. additional salary sacrifice contributions). This recommended contribution program is expected, on the basis of the actuarial assumptions adopted for this investigation, to maintain the Plan in a satisfactory financial position. On the assumptions adopted, it is anticipated that there will be scope for Employer contributions to reduce to the long-term rate of 17.2% of salaries around Projection of coverage of accrued benefit liabilities I have prepared a projection of Plan assets and benefit liabilities based on: the actuarial assumptions adopted for this valuation; the effects of changes in Vested Benefits due to members becoming eligible for the early retirement benefit, but allowing for known investment experience since 30 June 2011 (an investment return immediately after 30 June 2011 to 10 February 2012 of -2.3% for the period), and assuming that the Employer contributes on the basis as recommended above. 7

9 The results of that projection are as follows: Projected Coverage of Defined Benefit Liabilities 150% 140% 130% 120% 110% 100% 90% Year Vested Benefits (early retire from age 55) Vested Benefits (early retire from age 60) PV of Accrued Benefits Target This chart shows that, projected Plan assets will cover projected Vested Benefits (assuming early retirement from age 60) by a significant margin over the three years to 30 June The chart also shows the coverage level of assets compared with the Vested Benefits assuming early retirement from age 55. It is noted that the coverage of this measure is expected to fall below 100% by 30 June 2012 due to the impact of one member attaining age 55. To protect the Plan s financial position in the event that an early retirement benefit is paid with the Employer s consent, it is recommended that Top-up contributions are paid by the Employer to fund the higher benefit paid. The coverage level of assets compared with the Actuarial Value of Accrued Benefits is also projected. While the coverage is currently below 100%, is it expected that the coverage will improve over the next 6 years. The Trustee should note that this projection is based on the assumptions adopted, which represent a single scenario from the range of possibilities. The future is uncertain and the Plan s actual experience will differ from those assumptions; these differences may be minor in their overall effect, or they may be significant and material. In addition, different sets of assumptions or scenarios may also be within the reasonable range and results based on those alternative assumptions would be different. However the coverage ratios will be reviewed at least once every three years, and the Trustee s monitoring of the experience specified in the Notifiable Events section of the Funding and Solvency Certificate will provide a means of identifying adverse experience which warrants an immediate review of the Plan s financial position. Also note the monitoring program recommended in Section

10 Sections 1.8 and 3.7 provide an illustration of the impact of investment volatility on the projected coverage of Vested Benefits. 1.7 Key risks There are a number of risks relating to the operation of the Plan. The more significant financial risks relating to the defined benefits are: Investment risk borne by the Employer. The risk is that investment returns will be lower than assumed and the Employer will need to increase contributions to offset this shortfall. For example, if the assumed future investment return was reduced by 1% pa for all future years with no change in other assumptions, then: (i) the Actuarial Value of Accrued Benefits would increase by $358,000 (Employer funding cost impact $358,000 / 0.85 = $421,000), with a resulting reduction in the coverage of the Actuarial Value of Accrued Benefits from 95.7% (as per the table in Section 1.2) to 90.1% and (ii) the estimated employer cost of future service benefits would increase from 15.0% to 15.9% of salaries under this scenario. Another way of looking at this risk is that defined benefit assets currently represent around 253% of total defined benefit member annual salaries. This means that (with allowance for contributions tax) an additional Employer contribution of around 3.0% of annual salaries would be required to offset the negative impact of a 1% shortfall in investment returns. The actual investment return achieved by the Plan in future may vary (positively or negatively) from the rate assumed at this investigation by much more than the (negative) 1% pa illustrated in the example above. Sections 1.8 and 3.7 provide an illustration of the impact of investment volatility on the projected coverage of Vested Benefits over the next 6 years. Salary growth risk borne by the Employer. The risk is that wages or salaries (on which future benefit amounts will be based) will rise more rapidly than assumed, increasing benefit amounts and thereby requiring additional employer contributions. For example, if the assumed future salary increase rate was increased by 1% pa for all future years with no change in other assumptions, then (i) the Actuarial Value of Accrued Benefits would increase by $279,000 (Employer funding cost impact $279,000 / 0.85 = $328,000), with a resulting reduction in the coverage of the Actuarial Value of Accrued Benefits from 95.7% (as per the table in Section 1.2) to 91.3%, and (ii) the estimated employer cost of future service benefits would increase from 15.0% to 15.7% of salaries under this scenario. 9

11 The actual rate of future salary increases may vary (positively or negatively) from the rate assumed at this investigation by much more than the (positive) 1% pa illustrated in the example above. Legislative risk borne by the Employer. The risk is that legislative changes could be made which increase the cost of providing the defined benefits for example an increase in the rate of tax on superannuation funds or an increase in the Superannuation Guarantee (SG) rate. The Government has legislated an increase in the SG rate from 9% to 12% over the period This investigation assumes the SG rate remains at 9%. Changes arising from the Cooper Review of Australia s Superannuation System may also have some impact. 1.8 Illustration of potential investment volatility The Plan s defined benefit assets reflect the investment strategy outlined in Section 4.3 of this report. The value of these assets is likely to display a degree of volatility, which could result in the coverage of Vested Benefits being below 105% in three years time (i.e. lower than the adopted for this investigation). The projection shown below indicates that, in three years time, there is an 80% chance that coverage of Vested Benefits will be in the range of 118.6% to 133.3%. Please refer to Section 3.7 of this report for further details. Projected Coverage of Defined Benefit Liabilities (Vested Benefits Early Retire from age 60) 150% 140% 130% 120% 110% 100% 90% June Low Return Valuation Assumption High Return The Plan s Funding and Solvency Certificate will specify Notifiable Events which the Trustee needs to test for on a regular basis. These are designed to detect adverse experience that warrants an immediate review of the Plan s financial position. Recommendations on the monitoring process are set out in Section

12 1.9 Other statements and recommendations Investment policy With effect from 30 June 2009, the investment policy was changed to invest future contributions in the IOOF Capital Secure Trust. The lump sum contribution of $275,000 paid in 2009 was invested in the IOOF Cash Management Trust. The bulk of the defined benefit assets remain invested in the IOOF Mulitmix Balanced Fund. At 30 June 2011, the combination of these investments resulted in a benchmark 66% exposure to growth assets such as shares and property and a benchmark 34% exposure to defensive assets such as cash and fixed interest. This investment policy has the potential for substantial variability in investment returns. A substantial proportion of accrued defined benefits now relates to members who are in or approaching the five year early retirement period (starting from age 60), as can be seen from the graph in Section 2.1. This age profile results in significant expected benefit payments over the next 6 years, after which the Plan s defined benefit assets are expected to continue to wind down gradually over the following 7 to15 years. The nature of the Plan s investments is such that we do not envisage any problem in being able to redeem assets to meet benefit payments as they arise. However the shorter-term liability profile reduces the ability of the Plan to ride out the ups and downs in returns that are expected from the current investment strategy which has a substantial exposure to growth assets. Hence, we recommend that a review of the current investment strategy be undertaken, with particular consideration to be given to moving more of the defined benefit assets to a lower risk strategy. The review will also need to take into account the fact that some defined benefit liabilities (eg Resignation and Superannuation Guarantee minimum benefits) are affected by the return on defined benefit assets. We can prepare additional information to assist the Trustee and Employer in considering a change in investment strategy, including assessing the expected impact on the Employer contribution rate and on the variability of the financial position, if required. Please refer to Section 4.3 for further information and commentary Crediting Policy The draft statement setting out the Plan s crediting policy and related procedures is relatively brief. While I consider that the main features of the unit pricing and crediting policy are generally suitable, a review of the draft policy is currently being conducted. 11

13 Please see section 4.4 for further details Insurance I consider that the Plan s current insurance arrangements are suitable and provide adequate protection for the Plan. Section 4.5 of the report provides further details Requirements due to unsatisfactory financial position Section 130 of the SIS Act requires that if an actuary forms the opinion that a Plan s financial position may be unsatisfactory, or may be about to become unsatisfactory, and that opinion was formed in performing an actuarial function, the actuary must advise both the Trustee and the regulator (APRA) in writing immediately (an unsatisfactory financial position applies where assets are less than Vested Benefits). These requirements do not currently apply as I am of the opinion that the Plan s financial position is not unsatisfactory (or about to become unsatisfactory) Monitoring of financial position In practice, actual experience is likely to vary from the actuarial assumptions and hence the future vested benefits coverage levels are likely to vary from the projected levels set out in Section 1.6. Section 1.8 illustrates the sensitivity of the projections to the Plan s investment return. I therefore recommend that the progress of the Plan s coverage of vested benefits be reviewed after each annual review of the Plan to ascertain if an adjustment to the Employer contribution levels is required prior to the next complete investigation. The Trustee should also continue to monitor the Notifiable Events specified in the Plan s Funding and Solvency Certificate and advise the Actuary should any actual or potential Notifiable Events occur. 12

14 1.10 Additional information Significant events since the investigation date The recommendations take into account the actual investment return of -2.3% from 30 June 2011 to 10 February The legislated increase in the Superannuation Guarantee rate from 9% to 12% has not been taken into account. I am not aware of any other significant events that have occurred since 30 June 2011 which would have a material impact on the recommendations in this report. Next actuarial investigation - Required at a date no later than 30 June At that time, the adequacy of the Employer contribution levels will be reassessed. Note that the monitoring process recommended in Section may lead to an earlier reassessment ahead of the next full actuarial investigation. Enclosed Certificates - A certificate for Australian Accounting Standard AAS25 purposes is enclosed and forms part of this report. A new Funding and Solvency Certificate is also enclosed. Next Benefit Certificate required at or before the expiry of the current Benefit Certificate (which expires 30 June 2012). This certificate is required primarily by the Employer to demonstrate compliance with its Superannuation Guarantee obligations to employees who are members of the Plan. However the Trustee must ensure the benefits paid from the Plan are not lower than the minimum benefits specified in the Benefit Certificate. Actuarial advice on the impact and implementation of the increase in the SG rate should be sought before preparation of the new certificate Action required The Trustee should consider this report and confirm its agreement (or otherwise) to the contribution and other recommendations. The Trustee should also seek formal agreement from the Employer to contribute in line with the recommendations. The Employer has been consulted in relation to the contribution recommendations, and has indicated to me that it intended to adopt and implement those contributions. The Trustee should continue to monitor the contribution requirements under the Plan s Funding and Solvency Certificate and seek contributions from the Employer as appropriate. Note that if contributions paid are lower than recommended, the SIS legislation may require the actuary to report this to APRA. Actuarial advice on the implementation and any impact of the increase in the SG rate should be sought before preparation of the new certificate. 13

15 1.12 Actuary s certifications Professional standards and scope This report has been prepared in accordance with generally accepted actuarial principles, internal standards, and the relevant Professional Standards of the Institute of Actuaries of Australia, in particular PS400 which applies to...actuarial investigations of the financial condition of wholly or partially funded defined benefit superannuation funds. Use of report This valuation report should not be relied upon for any other purpose or by any party other than the Trustee of the Plan and the Employer(s) who contribute to the Plan. is not responsible for the consequences of any other use. This report should be considered in its entirety and not distributed in parts. The advice contained in this report is given in the context of Australian law and practice. No allowance has been made for taxation, accountancy or other requirements in any other country. Actuarial Uncertainty and Assumptions An Actuarial Investigation report contains a snapshot of a Plan s financial condition at a particular point in time, and projections of the Plan s estimated future financial position based on certain assumptions. It does not provide certainty in relation to a Plan s future financial condition or its ability to pay benefits in the future. Future funding and actual costs relating to the Plan are primarily driven by the Plan s benefit design, the actual investment returns, the actual rate of salary inflation and any discretions exercised by the Trustee or the Employer. The Plan s actuary does not directly control or influence any of these factors in the context of an Actuarial Investigation. The Plan s future financial position and the recommended Employer contributions depend on a number of factors, including the amount of benefits the Plan pays, the cause and timing of member withdrawals, plan expense, the level of taxation and the amount earned on any assets invested to pay the benefits. These amounts and others are uncertain and unknowable at the valuation date, but are predicted to fall within a reasonable range of possibilities. To prepare this report, assumptions, as described in Section 3, are used to select a single scenario from the range of possibilities. The results of that single scenario are included in this report. However, the future is uncertain and the Plan s actual experience will differ from those assumptions; these differences may be significant or material. In addition, different assumptions or scenarios may also be within the reasonable range and results based on those assumptions would be different. 14

16 Actuarial assumptions may also be changed from one valuation to the next because of mandated requirements, Plan experience, changes in expectations about the future and other factors. We did not perform, and thus do not present, an analysis of the potential range of future possibilities and scenarios. Because actual Plan experience will differ from the assumptions, decisions about benefit changes, investment policy, funding amounts, benefit security and/or benefit related issues should be made only after careful consideration of alternative future financial conditions and scenarios, and not solely on the basis of a set of valuation results. Data and Plan Provisions To prepare this report, we have relied on financial and participant data provided by the Plan s administrator. The data used is summarised in this report. We have reviewed the financial and participant data for internal consistency and general reasonableness and believe it is suitable for the purpose of this report. We have not verified or audited any of the data or information provided. We have also relied upon the documents, including amendments, governing the Plan as provided by the Trustee. The Trustee is ultimately responsible for the validity, accuracy and comprehensiveness of this information. If the data or Plan provisions are not accurate and complete, the valuation results may differ significantly from the results that would be obtained with accurate and complete information; this may require a revision of this report. Further Information If requested, the actuary is available to provide any supplementary information and explanation about the Actuarial Investigation. Prepared by... Julie Cook Fellow of the Institute of Actuaries of Australia 5 April

17 I have reviewed this report under s professional Peer Review Policy. I am satisfied that it complies with applicable professional standards and uses assumptions and methods which are suitable for the purpose.... Richard Codron Fellow of the Institute of Actuaries of Australia 16

18 2 Membership, Assets and Experience This section provides membership and asset information and summarises the principal elements of Plan experience since the last actuarial investigation. 2.1 Membership Defined benefit section membership summary The experience in this section relates to Defined Benefits only. Membership changes can normally be expected to have a financial effect upon a Plan, the extent of which depends largely on their number, the ages at which members leave, and the size of the benefit payments. The defined benefit section is now closed to new members and the membership has decreased from 22 as at 30 June 2008 to 18 as at 30 June The average age has increased from 52 as at 30 June 2008 to 54 as at 30 June The Defined Benefit membership movement during the review period is as follows: Benefit Category B C D E Total Members at 30 June less Exits Leaving Service Members at 30 June 2011 as used for projections of experience

19 In addition, there were 630 members at 30 June 2011 with total vested benefits of $20,261,000 whose benefits are determined wholly on a defined contributions (or accumulation ) basis. All new members join the accumulation section of the Plan. The membership data used for this investigation was provided by the Plan s administrator. I have carried out some broad reasonableness checks on the data and I am satisfied with the quality of the data and its suitability for this purpose Defined benefit member age profile The 30 June 2011 defined benefit membership split by age is shown in the following graph: Defined Benefit Member Age Distribution at 30 June Number Cumulative % age 100.0% 90.0% 80.0% 70.0% Number % 50.0% 40.0% 30.0% 20.0% 10.0% Percentage Age attained at June 2011 One of the significant characteristics of the membership highlighted by the above graph is that over 50% of members (by number) are aged 55 or more, meaning that a significant level of benefit payments can be expected over the next decade or so. 0.0% 2.2 Assets The net market value of the Plan s assets as at 30 June 2011 amounted to $26,801,000 (based on the data provided by the Plan s administrator). Accounts for accumulation members totalled $20,261,000 and accumulation accounts for defined benefit members (primarily additional voluntary contribution accounts) totalled $981,000, leaving assets of $5,559,000 to support the defined benefit liabilities of the Plan. This value has been used for the purposes of the valuation. The data used for this investigation was supplied by the administrators of the Plan. Although we have no reason to doubt the quality of the data, the results of this investigation are dependent on that quality. I am, however, satisfied that the data provided is reasonable for the purposes of this investigation. 18

20 2.3 Experience Investment returns and crediting rates The table below shows the rates of investment earnings (after tax, investment fees and asset based administration fees) for assets supporting defined benefits over the period since the previous investigation. Period Return Assumed in 2008 Year ending 30 June % 6.5% Year ending 30 June % 6.5% Year ending 30 June % 6.5% Average Return over Period (p.a.) -1.4% 6.5% The average investment return for the three year period to 30 June 2011 was -1.4% p.a. compared to our longer term assumption at the last Actuarial Investigation of 6.5% p.a. The lower than assumed return had a significant negative impact on the Plan s financial position Salary increases Salaries for the current defined benefit members increased by an average of 14.4% (4.6% p.a.) over the period compared to our longer term assumption at the last Actuarial Investigation of 14.1% (5.5% in first year, 4.0% p.a. thereafter). The slightly higher than assumed salary increases had a small negative impact on the Plan s financial position Changes in membership/decrements During the period under review the number of defined benefit members within the Plan decreased. This has not had a material impact on the Plan s overall financial position Contributions The Employer contribution rates over the three year review period, in accordance with the contribution recommendations in our letter dated 25 June 2009 were as follows: Benefit Category Defined Benefit members Others (Accumulation members) Contribution Rate (% salary) Employer contribution of 21% of salaries, plus; 5.9% of salaries for members of Categories B, C, and D At rate required to meet Superannuation Guarantee requirements plus a lump sum of $275,000 paid before 30 June

21 The Employer contributions paid over the review period were higher than the long term Employer contribution rate (i.e. the estimated employer cost of future service benefits refer Sections and 3.6), which had a positive impact on the Plan s financial position. 2.4 Change in financial position since previous valuation The table below shows the coverage of assets over Vested Benefits and the Actuarial Value of Accrued Benefits as at 30 June 2011, and the corresponding values at the previous valuation date. Coverage of Defined Benefits by Assets 30 June June 2008 Vested Benefits (Early Retire from age 60) 143.1% 123.8% Actuarial Value of Accrued Benefits 95.7% 104.2% The overall experience over the review period was negative, with the adverse impact of investment returns and salary increases outweighing the favourable impact of contributions above the long term cost. 20

22 3 Valuation methodology, assumptions and results This section sets out the considerations, methods and assumptions involved in performing the actuarial projections of future experience and shows the results of those projections. The actuarial process includes projections of possible future Plan assets and benefit liabilities on the basis of actuarial assumptions about future experience. These assumptions include investment returns, salary/wage increases, crediting rates, rates at which members cease service for different reasons, and various other factors affecting the financial position of the Plan. Material assumptions are set out in Section 3.3. It is not expected that these assumptions will be precisely borne out in practice, but rather that in combination they will produce a model of possible future experience that is considered a suitable basis for setting contribution rates. 3.1 Funding Requirements Provisions of the Trust Deed The rules of the Plan include requirements that: the Trustee ensures an actuarial investigation of the Plan is conducted when required by legislation. Accordingly actuarial investigations are carried out at three yearly intervals at a minimum; and if the Employer fails at any time to make the level of contributions recommended in the last Actuary s report the Trustee must take whatever steps are prescribed by legislation and may consult the Actuary to determine the appropriate course of action. 21

23 3.1.2 Professional requirements Under Professional Standard 400 issued by the Institute of Actuaries of Australia, the funding method selected by the actuary must aim to provide that: (a) members' benefit entitlements (including any pension increases provided by the Trust Deed or in accordance with either precedent or the intentions of the Trustee and/or Fund Sponsor) are fully funded before the members retire; and (b) the assets of the Fund from time to time, after making full provision for the entitlements of any beneficiaries or members who have ceased to be employed, exceed the aggregate of benefits which employed members would reasonably expect to be payable to them on termination of membership, including the expenses of paying those benefits, and having regard to the provisions of the Trust Deed and the likely exercise of any Options or Discretions. (Paragraph of PS400). Accordingly the actuary needs to be satisfied that any funding program is expected to provide a level of assets which meets or exceeds immediate benefit entitlements based on members reasonable expectations. Should assets fall below that level, the funding program needs to aim to lift assets to at least the required level over a reasonable time period and to maintain assets at or above the required level thereafter. The financing objective (refer Section 1.3) has been set on the basis that members reasonable expectations on termination would be to receive their vested benefit entitlement. 3.2 Financing the benefits Ultimate cost of providing Plan benefits The ultimate cost to the Employer of providing Plan benefits is: the amount of benefits paid out; plus the expenses of running the Plan, including tax; less members contributions; and the return on investments. The ultimate cost to the Employer will not depend on the actuarial investigation assumptions or methods used to determine the recommended Employer contribution rate, but on the actual experience of the Plan. The financing method and actuarial assumptions adopted will however affect the timing of the contribution requirements from the Employer. 22

24 3.2.2 Financing method There are various financing methods that could be followed in setting the Employer contribution level. This investigation uses the Attained Age Normal method. Under this method, the normal cost is the estimated level rate of Employer contributions required to provide benefits in respect of future service (i.e. service after the investigation date) for existing members. The normal cost ignores any surplus or deficiency of assets over accrued liabilities. The recommended Employer contribution rate may then be set above or below the normal cost for a suitable period of time to amortise any surplus/deficiency and to take into account the Plan s financing objectives. Under this method of financing, the level of the Employer contributions may vary from time to time to ensure that the Plan remains on course towards its financing objectives. It is noted that, as the defined benefits are closed to new members and (on the assumptions adopted) the cost of future service benefits increases with age, the normal cost is expected to gradually increase as the defined benefit membership ages. I consider that the Attained Age Normal method is suitable in the Plan s current circumstances as the normal cost reflects the expected (on the assumptions adopted) employer cost of future service benefits and the recommended contribution rate can be varied around the normal cost to take into account the projected financial position as compared with the financing objective. This method has changed from the Aggregate method used at the previous investigation to better reflect the expected cost of future service benefits. There is no change to the value of accrued benefits. 3.3 Actuarial assumptions Economic assumptions The most significant assumption made in estimating the cost of defined benefits is the difference between: the assumed rate of investment earnings; and the rate of salary increases used in the projections of future benefit payments. This difference is commonly referred to as the gap. 23

25 The key economic long term assumptions adopted for this investigation are: Main Assumptions Investment returns (after tax, asset-based administration fees and investment fees) # 6.2% per year General salary increases 4.5% per year # in the projections of Plan experience shown in Sections 1.6, 1.8 and 3.7, the first year investment return assumed, incorporates allowance for the actual return over the period 30 June 2011 to 10 February 2012 of -2.3%. The assumption for investment returns is based on the expected long-term investment return for the Plan s current benchmark investment mix, calculated using Investment Consulting s assumptions of the means and standard deviations of returns from the various underlying asset classes and the correlations of returns between those asset classes. The general salary increase assumption is based on long term economic forecasts for future increases in average weekly earnings (AWOTE) and discussions with the Employer Other assumptions New members The Plan s defined benefit section is closed to new entrants. No allowance has been made for new members. Expenses Based on recent experience, administration and management expenses plus the net cost of group life insurance for defined benefit members are assumed to average 2.0% of defined benefit members salaries. Tax It is assumed that the current tax rate of 15% continues to apply to the Plan s assessable income, along with current tax credits and other concessions. All future Employer contributions are assumed to be subject to 15% contribution tax, after deduction of any insurance premiums and administration and management costs. All contribution recommendations quoted in this report are gross of contribution tax. No allowance has been made for any surcharge liability as members benefits will be reduced by a surcharge offset amount equal to the surcharge payments made, accumulated at the Plan crediting rate. Surcharge was abolished with effect from 1 July No allowance has been made for excess contributions tax, as this is payable by the member and cannot be met from defined benefits. 24

26 Death and Disablement I have maintained the same assumptions in relation to rates of death and total and permanent disablement (TPD) as were adopted at the 30 June 2008 Actuarial Investigation. Given the small size of the Plan, these are based on the experience of similar plans administered or advised by. Examples of the number of death and total and permanent disablements assumed per 10,000 members at each age are given below: Age Assumed Death Rate Assumed TPD Rates Retirement It is assumed that Employer consent is not granted for early retirement, where required. Given the small size of the Plan, these are based on the experience of similar plans administered or advised by. The rates at which members are assumed to leave the Plan due to retirement are set out below: Age Assumed Retirement Rate % at each age % at each age % Resignation Specimen rates at which members are assumed to leave the Plan due to resignation are set out below. Given the small size of the Plan, these are based on the experience of similar plans administered or advised by. Age Assumed Resignation Rate Superannuation Guarantee (SG) rate The Government has legislated an increase in the SG rate from 9% to 12% over the period This investigation assumes the SG rate remains at 9%. Actuarial advice on the implementation and any impact of the change should be obtained. 25

27 Value of Assets For the purpose of the investigation, the value placed on the assets was determined as set out in Section Changes in assumptions since the previous valuation The following table sets out changes in assumptions from those used in the previous investigation and the reasons for the changes: Assumption 30 June 2011 Valuation 30 June 2008 Valuation Reason for change Investment Returns 6.2% p.a. 6.5% p.a. Expected return based on s latest investment return model and a change in investment and asset based fee allowed for in determining the expected return General Salary Increases 4.5% p.a. 5.5% p.a. until 30 June 2009, 4.0% thereafter Discussion with employer The overall impact of the changes in assumptions was to: increase the Actuarial Value of Accrued Benefits by $219,000 increase the assessed long-term Employer cost of future service benefits from 14.6% to 15.0%. 3.4 Method of calculating the Actuarial Value of Accrued Benefits The calculation of the Actuarial Value of Accrued Benefits has been carried out using a method of apportionment of benefits between past and future membership that satisfies the requirements of Professional Standard No. 402 of the Institute of Actuaries of Australia and is acceptable for Australian Accounting Standard AAS25 purposes. More details on the method can be found in the attached summary of the actuarial report prepared for AAS25 purposes. 3.5 Valuation results in summary The actuarial projection of possible future experience produced the following results, where projected future payments have been converted to a present value by discounting at the assumed rate of investment returns. 26

28 Item Actuarial Value $M Present Value of future defined benefits payments in respect of membership accrued at valuation date Present Value of future defined benefits payments in respect of membership after valuation date Total Present Value of future payments out of Plan Value of Plan Assets at 30 Jun Present Value of future Employer contributions (at 21% of all members salary plus 5.9% deemed member contributions for category B, C, and D) Present Value of future Member contributions (at 5% of category E members salary) Total available Assets (in absence of other contributions) Excess/(Deficit) of Assets to value of benefits The valuation results indicate that current contribution rates are expected to be more than sufficient to fund future payments, if future experience matches the assumptions. However, taking into account the financing objectives, I have recommended below that the current contribution rates be continued for the time being. If future experience matches the assumptions, I expect that there will be scope to reduce the employer contribution rates in around Note: the values above make no allowance for the weaker than assumed investment return emerging in the period since 30 June Contribution requirements Based on the assumptions adopted for this investigation, I estimate that the Employer s long-term defined benefit funding costs (i.e. the normal cost of funding future service defined benefit accruals for each category, determined as set out in Section above) are as follows: Defined Benefit Membership Group Employer long-term cost (of future benefit accrual) (% of Salary/Wage) Category B 17.1% Category C 14.0% Category D 12.9% Category E 10.7% Average (weighted by salary) 15.0% 27

29 However, the projections in Section 1.6 indicate that continuation of the current contribution program is required to maintain coverage of Vested Benefits (Early Retirement as a right from age 60) over the next 6 years. In the event of Employer consent being given to Early Retirement between age 55 and 60, it is recommended that Top-up contributions be paid. The amount of Top-up contributions would be the difference between the Early Retirement Benefit and the Resignation Benefit for the individual member, grossed up for 15% contribution tax. The recommended contribution program is summarised as follows: Defined Benefit members: 21% of salaries for all defined benefit members, plus An additional 5.9% of deemed member contributions for Category B,C, and D members, plus Top-up contributions for early retirement benefits with Employer consent, plus Any additional employer contributions agreed between the Employer and a member (e.g. additional salary sacrifice contributions). Accumulation members: 9% of Ordinary Time Earnings (or such lesser amount as required to meet the Employer s obligations under Superannuation Guarantee legislation or employment agreements), plus Any additional employer contributions agreed between the Employer and a member (e.g. additional salary sacrifice contributions). 3.7 Investment volatility I have considered the impact of investment volatility on the Plan s financial position over the next few years using a high return and a low return scenario. The returns under both scenarios have been derived from assumptions about the likely risk attached to the Plan s defined benefit investment strategy. Using the investment return model and assumptions adopted, there is approximately only a 10% chance of the Plan s cumulative investment return being less than the low return scenario. Similarly, there is approximately only a 10% chance of the Plan s cumulative investment return being greater than the high return scenario. Allowance has been included for a -2.3% return for the period immediately following 30 June 2011 to 10 February For the period Assumed Cumulative Investment Return (%) ending 30 June "Low Return" Investigation "High Return" % 0.1% 3.3% % 6.3% 15.6% % 12.9% 25.3% % 19.9% 34.8% % 27.4% 44.7% % 35.3% 55.2% 28

30 The cumulative investment return is the total return from 30 June 2011 up to 30 June in the year shown. The assumed returns allow for short term variation in annual investment results which gradually revert to the average long term annual rate adopted for the valuation. The extent of variation allowed for in these projections reflects the Plan s asset mix and s views on potential variability in investment results in various investment sectors. The graph below shows the effect on the projected ratio of assets to Vested Benefits for defined benefit members under the high return and low return scenarios, with all other investigation assumptions remaining unchanged. Projected Coverage of Defined Benefit Liabilities (Vested Benefits Early Retire from age 60) 150% 140% 130% 120% 110% 100% 90% June Low Return Valuation Assumption High Return The Plan s vested benefits coverage is highly sensitive to changes in the investment returns. Based on fluctuations in investment returns only, and assuming other experience is in line with the assumptions adopted for this investigation, there is approximately an 80% chance that the coverage of assets over Vested Benefits at 30 June 2014 will fall in the range from 119% to 133%. Please note that the Low Return Scenario and the High Return Scenario shown above are illustrations only, and show what may occur under assumed future experiences which differ from our baseline assumptions. These scenarios do not, in any way, constitute upper or lower bounds and the actual future coverage of vested benefits may differ significantly from the range shown above, depending on actual future experience. In my view, the Trustee should be satisfied with the expected level of security over the next few years if the Employer contributes at the recommended levels. However, given the sensitivity of the Plan s financial position to future experience, I have recommended in Section that regular monitoring of the Plan s experience and financial position be undertaken to ascertain whether an adjustment to the recommended contribution program is required prior to the next complete investigation. 29

31 It is also noted that Section 1.7 includes an illustration of the effect on the Actuarial Value of Accrued Benefits and the long term employer contribution rate (the estimated employer cost of future service benefits) of assuming a lower long-term earning rate. 30

32 4 Plan Design and Policies This section outlines the main characteristics of the Plan, including the design of the defined benefits, investment policy, crediting policy and insurance arrangements. 4.1 Background information The Plan is operated for the benefit of employees of Heritage Bank Limited (formerly Heritage Building Society Limited) and is a part of Spectrum Super. The Trustee of Spectrum Super, IOOF Investment Management Limited, holds a Registrable Superannuation Entity Licence under the SIS legislation and operates the Plan as required under the Trust Deed. This report is provided for the Trustee and presents the results of the Actuarial Investigation of the Plan as at 30 June It has been prepared in accordance with the requirements of the Trust Deed, the SIS legislation and Professional Standard 400 of the Institute of Actuaries of Australia. The previous Actuarial Investigation was conducted as at 30 June 2008 by Paul Francis, on behalf of, and the results are contained in a report dated 13 May The Plan is a resident regulated fund and a complying superannuation fund for the purposes of the SIS legislation. The Plan is taxed as a complying superannuation fund. The advice contained in this report is given in the context of Australian law and practice. No allowance has been made for taxation, accountancy or other requirements in any other country. 31

33 4.2 Summary of benefits The governing rules of the Plan are set out in the IOOF Portfolio Services Superannuation Fund trust deed dated 20 June 1994 (as amended). A summary of the main benefit provisions in respect of defined benefit members is set out below. References should be made to the formal governing documents for definitive statements. Membership Categories The following 8 categories are used for administrative purposes (and in the summary of benefits given below): Category Description Defined Benefit Section B C D E Accumulation Section AFG H I J Senior Executives Senior Management Special Salaried Staff Salaried/Full-Time Award Staff Directors, Non Contributory Staff & Award Casual Employees New permanent employees and transferring members who have transferred to this Category from 1 April 2001 New Directors and Award Casuals employees from 1 April 2001 Spouses Spouse Members (Category J) Spouses of Plan members may join the Fund. The benefits provided to spouse members is equal to the accumulation of their own contributions less tax (if any) and charges with interest based on the investment options chosen by the member. Accumulation Members (Categories A, F, G, H, I) Accumulation members are entitled to an accumulation benefit of contributions paid less tax and charges plus interest on any mode of exit. 32

34 Defined Benefit Members (Categories B, C, D, E) The remaining benefits relates to Defined Benefit members of the Plan. Accumulation Credit In addition to the benefits described below, Defined Benefit members are entitled to an accumulation benefit of the Accumulation Credit. This credit includes any additional contributions made by the Employer or member and any amounts the member rolls into the Plan. The Accumulation Credit is payable on any mode of exit. In addition, any Superannuation Surcharge paid by the Plan in respect of a member is accumulated with interest and deducted from a member s benefit at the time of payment. Member Accounts and Contributions Employer Basic Account (EBA) - Contributions credited to the EBA will be at the minimum rate as determined by the Superannuation Guarantee (Administration) Act 1992, plus the 5.9% member contributions (deemed contributions for Categories B, C and D). Employer Additional Account (EAA) Contributions credited to the EAA will be at the difference between the applicable rate in the following table and the minimum rate as determined by the Superannuation Guarantee (Administration) Act 1992 (now 9%). Category Applicable Rate (%) Resulting Current Rate (%) B C D E 9.0 nil Normal Retirement Date The 65 th birthday of the Member. Prior Membership (PM) Membership of the Plan in years and months (part months counted as a full month) prior to 1 July

35 Future Membership (FM) The period of membership in years and complete months from the later of 1 July 1993 and the Member s date for Benefits to the date of exiting the Plan. Accrued Retirement Multiple (ARM) A Member s Accrued Retirement Multiple (for membership prior to 1 July 1993) is calculated as the Member s normal retirement multiple under the benefit design which applied to Transferring Members prior to 1 July 1993 reduced by 12.5% for each year of potential membership (with months counting proportionally) from 1 July 1993 to the Member s Normal Retirement Date. Final Average Plan Salary (FAPS) The average of a Member s Plan Salary (PS) at the last 3 Annual Review Dates. Final Average Package Amount (FAPA) The average of a Member s Package Amount (PA) at the last 3 Annual Review Dates. Normal Retirement Benefit The Benefit payable on the Normal Retirement Date is a lump sum equal to: ARM x FAPS + P% x FM x FAPA where P is as follows: Category P B 20.0 C 17.5 D 16.0 E 16.0 The Normal Retirement Benefit will not be less than the Resignation Benefit. Early Retirement Benefit A member can retire from age 60 (age 55 with the Employer s consent) and receive a lump sum Benefit equal to: ARM x FAPS + P% x FM x FAPA where P is as tabulated above The Early Retirement Benefit will not be less than the Resignation Benefit. 34

36 Death and Total and Permanent Disablement These Benefits are equal to the Normal Retirement Benefit calculated by replacing Final Average Plan Salary by Plan Salary and Final Average Package Amount by Package Amount. Guaranteed Benefits exist for some Members. The Benefit will be increased by any voluntarily insured amount. Neither the Death Benefit nor the Total and Permanent Disablement Benefit will be less than the Resignation Benefit. The benefit may be adjusted in circumstances where the Trustee in unable to obtain the full intended level of Group Life Insurance for a member. Resignation A Member s Resignation Benefit will be determined as: (5% x Plan Salary x Membership to 1 July 1993) x (1 + VFO) plus EBA + EAA x VF where VFO is Complete Years of Category B, C, D or E Membership VFO 0 4 Nil 5 25% more than 5 25% plus 5% for each complete year in excess of 5, to a maximum of 100% and where VF is 10% for each complete year of Category B, C, D or E Membership, with a maximum of 100%. PROVIDED THAT in respect of a Member who ceases Service prior to his or her 55th birthday: (a) on account of ill health which in the opinion of the Trustee has severely reduced his or her earning capacity in employment; or (b) in special circumstances other than ill health, the Trustee may in its absolute discretion apply higher values for VFO and VF, each up to a maximum of 100% 35

37 FURTHER PROVIDED THAT for Category E Members who were Members of this Category as at 7 April 1996, the Resignation Benefit shall be no less than the Resignation Benefit which would have been payable under the Rules of this Category in force as at 7 April This minimum is determined as: (5% x Plan Salary x Membership to 1 July 1993) x (1 + VFO) plus Member Contribution Account x (2 + 10% for each complete year of membership in excess of 2). Temporary Disability Benefit A Salary Continuance Benefit of 75% of the Plan Salary is payable on total but temporary disablement after 30 days, for a period of up to 2 years (subject to any insurance limits that may apply). Minimum Benefits Each of the Benefits described above are subject to the Minimum Requisite Benefit (MRB) to be calculated in accordance with the Benefit Certificate of the Plan. Employer Contributions The Employer contributes the balance needed to meet the cost of the defined benefits. Employer contributions are not allocated to individual members but are applied as required to provide benefits. Superannuation Surcharge The surcharge commenced with effect from 20 August 1996 and is essentially an additional tax on high income earners calculated and collected via superannuation funds. The surcharge has been abolished from 1 July The determination of surcharge is partially dependent on information the Australian Taxation Office receives from individuals. Therefore, it is possible that some surcharge payments will continue to be required over the next few years in respect of years prior to 1 July The accumulated amount of all Surcharge Assessments paid by the Plan (accumulated with investment earnings forgone by the Plan) is deducted from the benefit payable to or on behalf of a member. Discretions The table below indicates the material discretions available to the Trustee and Employer and the member options specified within the Plan s legal documents, to the extent that these affect benefits. The table also shows the general prevalence of the past exercise of discretions and the options chosen by the members. 36

38 Please note that past exercises of discretions should not be viewed as precedents which would constrain any future decisions. Trustee and Employer Discretions Description and Deed Reference Employer discretion of providing consent for Early Retirement between ages 55 to 60 Historical Prevalence One payment made during the review period Neither the Trustee nor the Employer has a right within the Trust Deed to review benefits or member contribution rates. Minimum Benefit Benefits on leaving service for any reason are subject to a minimum Superannuation Guarantee benefit described in the Plan s Benefit Certificate. The Superannuation Guarantee (Administration) Act 1992 This Act requires employers to provide minimum superannuation benefits that are fully vested in their employees within a complying superannuation fund. The contribution rates recommended in this report and the projected financial positions allow for benefits being augmented as necessary to meet the minimum Superannuation Guarantee (SG) benefit described in the Plan s current Benefit Certificate, which is based on an SG rate of 9%. The Government has legislated an increase in the SG rate from 9% to 12% over the period This investigation assumes the SG rate remains at 9%. Actuarial advice on the implementation and any impact of the change should be obtained. 4.3 Investment policy Assets backing accumulation benefit liabilities The Plan provides members with a range of investment options for their accumulation benefits (including the additional account balances of defined benefit members). The assets supporting the Plan s accumulation benefit liabilities are invested according to members selected investment options and the actual returns on those investments (whether positive or negative) are passed on to members via changes in the unit prices by which member account balances are determined. Thus the Plan s accumulation liabilities and related assets are matched. The Plan s investments are expected to provide a high level of liquidity in normal circumstances. I consider that the Plan s investment policy for assets relating to accumulation liabilities is suitable, having regard to the nature and term of these liabilities. 37

39 Assets backing defined benefit liabilities The Plan s investment strategy for assets supporting defined benefit liabilities, the mix of IOOF MultiMix Balanced Growth Trust, IOOF Capital Secure Trust and IOOF Cash Management Trust. At 30 June 2011, this mix involves a benchmark 66% exposure to growth assets such as shares and property and a benchmark 34% exposure to defensive assets such as cash and fixed interest (refer to table below for benchmark investment allocation of these assets as at the investigation date). Growth assets are expected to earn higher returns over the long term compared to defensive assets, but at the same time to exhibit more variation in returns from year to year. Benchmark Asset Allocation Alternatives, 7.5% Cash, 16.5% Australian Shares, 25.8% Australian Fixed Interest, 17.9% Property, 7.1% Overseas Shares, 25.2% The defined benefit liabilities (other than the SG minimum benefit) are not affected by the investment return on the Plan s assets. The volatility of the Plan s investment returns will therefore affect the financial position of the Plan from year to year (refer illustrations in section 3.7) and is likely to impact on the required level of Employer contributions (refer illustration in section 1.7). A substantial proportion of accrued defined benefits now relates to members who are in or approaching the five year early retirement period (starting from age 60), as can be seen from the graph in Section 2.1. This age profile results in substantial expected benefit payments over the next 6 years, after which the Plan s defined benefit assets are expected to continue to wind down gradually over the following 7 to15 years. The nature of the Plan s investments is such that we do not envisage any problem in being able to redeem assets to meet benefit payments as they arise. However the shorter-term liability profile reduces the ability of the Plan to ride out the ups and downs in returns that are expected from the current investment strategy which has a substantial exposure to growth assets. Hence, we recommend that a review of the current investment strategy be undertaken, with particular consideration to be given to moving more of the defined benefit assets to a lower risk strategy. 38