Monroe Australia Superannuation Fund

Consulting (Australia) Pty Ltd ABN 55 153 168 140 AFS Licence # 411770 108 North Terrace Adelaide SA 5000 GPO Box 9946 Adelaide SA 5001 08 8110 3400 Fax 08 8127 9581 17 May 2012 Monroe Australia Superannuation Fund (a sub-fund of Spectrum Super) Statement of Advice Report to the Trustee on the Actuarial Investigation as at 30 June 2011 report)\monroe 30 06 2011 act inv report_final.doc

Contents Executive Summary...ii 1. Key results and recommendations... 1 1.1 Purpose... 1 1.2 Financial position as at 30 June 2011... 1 1.3 Financing objective adopted for investigation... 3 1.4 Main items of Fund experience... 4 1.5 Recommended contribution rates... 4 1.6 Projection of coverage of accrued benefit liabilities... 5 1.7 Key risks... 6 1.8 Illustration of potential investment volatility... 7 1.9 Other statements and recommendations... 8 1.10 Additional information... 10 1.11 Action required... 10 1.12 Actuary s certifications... 11 2. Membership, assets and experience... 14 2.1 Membership Data... 14 2.2 Assets... 15 2.3 Experience... 15 2.4 Change in financial position since previous investigation... 17 3. Investigation methodology, assumptions and results... 18 3.1 Funding Requirements... 18 3.2 Financing the benefits... 19 3.3 Actuarial assumptions... 20 3.4 Method of calculating the Actuarial Value of Accrued Benefits... 23 3.5 Investigation results in summary... 23 3.6 Contribution requirements... 24 3.7 Investment volatility... 24 4. Fund design and policies... 27 4.1 Background information... 27 4.2 Summary of benefits... 28 4.3 Investment policy... 32 4.4 Crediting Policy... 34 4.5 Insurance... 35 5. SIS Statements... 37 6. Glossary... 39 i

Throughout this report the is referred to as the Fund. Any reference to the Company may include all companies who participate in the Fund as appropriate to the context. Executive Summary This report on the actuarial investigation of the Fund as at 30 June 2011 has been prepared to meet the requirements of the Fund s governing rules and the SIS legislation. Experience over review period The overall experience over the review period was slightly positive relative to our expectations, based on slightly higher than expected investment returns, lower than expected salary increases and Company contributions in excess of the long-term cost of future accruing benefits (but lower than recommended at the 30 June 2008 investigation during 2010/11). Sections 1.4 and 2.3 provide further details. Financial position as at 30 June 2011 Defined Benefits Only* Total Fund $000 Asset Coverage $000 Asset Coverage Assets 5,529 5,965 Vested Benefits (no consent) 5,510 100.3% 5,946 100.3% Vested Benefits (consent) 5,544 99.7% 5,980 99.8% Retrenchment 5,762 96.0% 6,198 96.2% Actuarial Value of Accrued Benefits 6,023 91.8% 6,459 92.4% * Excludes additional accumulation account balances (member AVC and surcharge) and the benefits for late retirees (who are entitled to accumulation only benefits) The coverage levels at 30 June 2011 indicate that the Fund was in a satisfactory financial position based on vested benefits (without consent). However, assets were not sufficient to cover vested benefits (assuming Company consent for early retirement) or the actuarial value of accrued benefits. Furthermore, due to poor investment returns since the investigation date, I expect that the assets have fallen to less than the vested benefits (without consent) as well as less than vested benefits (assuming Company consent for early retirement) or the actuarial value of accrued benefits. The Fund s financial position has therefore become unsatisfactory under the definition in the SIS legislation. APRA were advised of this situation in our letter of 25 January 2012, as required by SIS legislation. ii

Recommended contribution rates Based on the results of this actuarial investigation, I recommend that the Company makes contributions to the Fund as follows: For the year from 1 July 2011 to 30 June 2012 nil in respect of Category C members nil in respect of Category B members 23.0% of Category D1 members salaries 23.0% of Category D2 members salaries 17.0% of Category D3 members salaries, For the period 1 July 2012 to 30 June 2014 nil in respect of Category B members nil in respect of Category C members 27.0% of Category D1 members salaries 27.0% of Category D2 members salaries 21.0% of Category D3 members salaries, The contribution rates include an allowance for deemed/salary sacrifice member contributions in relation to Categories D1 and D2. Contributions for any excess of Ordinary Time Earnings (OTE) over Fund Salary in relation to 9% SG entitlements are also payable and are applied to a separate accumulation account. The recommended level of Company contributions is expected, on the basis of the assumptions adopted for this investigation, to restore the Fund to a satisfactory financial position and meet the financing objective over the period to 30 June 2014. Other recommendations As retrenchment benefits are higher than vested benefits, the Trustee and Company should form a view as to whether there is the potential for payment of significant retrenchment benefits such that any funding implications can be addressed (refer section 1.2). It is my understanding that on termination of the Fund, benefits are limited to the available assets. I recommend clarification of this interpretation by the Trustee so that the implications of any different interpretation can be considered (refer section 1.2). While the current investment strategy is acceptable, a review may be appropriate, with consideration to be given to moving part or all of the defined benefit assets to a lower risk strategy, should the Company wish to reduce the potential for volatile contribution requirements (refer section 4.3). Actuarial advice on the implementation and any impact of the increase in the SG rate should be sought before preparation of the new Benefit Certificate. The Trustee should confirm that it is monitoring the application of a 4% per annum compound minimum crediting rate since 1 January 1988 for compulsory account balances and advise the Actuary of the current compound average rate (refer section 4.2). iii

1 Key results and recommendations This section highlights the critical issues relating to the Fund 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 Monroe Australia Superannuation Fund for the following purposes: Present the results of an actuarial investigation of the Fund as of 30 June 2011; Review Fund experience for the period since the previous actuarial investigation (effective at 30 June 2008); Recommend contributions to be made by the Company intended to allow the Fund 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 Fund s Trust Deed for actuarial investigations of the Fund s financial position; and To meet legislative requirements under relevant Commonwealth superannuation legislation. 1.2 Financial position as at 30 June 2011 Defined Benefits Only* Total Fund $000 Asset Coverage $000 Asset Coverage Assets 5,529 5,965 Vested Benefits (no consent) 5,510 100.3% 5,946 100.3% Vested Benefits (consent) 5,544 99.7% 5,980 99.8% Retrenchment 5,762 96.0% 6,198 96.2% Actuarial Value of Accrued Benefits 6,023 91.8% 6,459 92.4% 1

* Excludes additional accumulation account balances (member AVC and surcharge) and the benefits for late retirees (who are entitled to accumulation only benefits) Refer to the Glossary (Section 6 of this report) for descriptions of the measures of liability shown above and Section 2.4 for comparison with the position at the previous investigation date. Vested Benefits Vested benefits are the benefits payable as of right if all members voluntarily resigned or, if eligible, retired at the investigation date. If the coverage of these benefits is below 100%, the Fund would be considered to be in an unsatisfactory financial position under SIS legislation. An early retirement benefit may be paid to Category B and D members aged between 55 and 60 with the consent of the Company. In addition, benefits for Category C members after age 55 are subject to Company consent. The vested benefits have been determined both on the basis that Company consent is not granted and that Company consent is granted. At 30 June 2011, Fund assets were greater than vested benefits (no consent) but less than vested benefits (consent). Retrenchment Benefits The retrenchment benefits are the benefits payable should the Company terminate member s employment. Coverage of this measure is desirable, but not essential, depending on the likelihood that these benefits will become payable. For the purposes of this investigation, no specific allowance is made for the possibility of future retrenchments. The Trustee and Company should form a view as to whether there is the potential for payment of significant retrenchment benefits. Any retrenchment program would require additional actuarial assessment. Actuarial Value of Accrued Benefits Fund assets were significantly below the actuarial value of accrued benefits. This is an actuarial measure of all future benefit payments, attributable to membership to date, discounted to the investigation date. This measure is calculated using the actuarial methods and assumptions detailed in Section 3. It provides an indication of the Fund s long term progress towards financing the expected benefits payments. Greater than 100% coverage generally indicates a sound level of funding over the longer term. Under SIS legislation, an actuarial investigation report must include the actuary s opinion as to the adequacy of assets to meet accrued benefits at the investigation date and over the following three years. The required statements are included in Section 5. Overall financial position The coverage levels at 30 June 2011 indicate that the Fund was in a satisfactory financial position based on vested benefits (without consent). However, assets were not sufficient to cover vested benefits (assuming Company consent for early retirement) or the actuarial value of accrued benefits. 2

Furthermore, due to poor investment returns since the investigation date, I expect that the assets have fallen to less than the vested benefits (without consent) as well as less than vested benefits (assuming Company consent for early retirement) or the actuarial value of accrued benefits. The Fund s financial position has therefore become unsatisfactory under the definition in the SIS legislation. APRA were advised of this situation in our letter of 25 January 2012, as required by SIS legislation. SG legislation requires the Company to provide a minimum level of benefit. These benefits are set out in the Fund s Benefit Certificate. If the coverage of these benefits is below 100%, the Fund would be considered to be technically insolvent under SIS legislation. The SG minimum benefits are less than or equal to vested benefits (no consent) in all cases. I expect the SG minimum benefits to remain fully covered by the assets in the 3-year period from 30 June 2011. However, the Trustee should be looking to maintain adequate funding to provide for the Fund s total expected benefit liabilities, and not just SG minimum benefits. It is my understanding that if the Fund was to be terminated, the liability under the governing rules is limited to whatever assets are then held in the Fund. I recommend that this be confirmed by the Trustee and advised to the Company. 1.3 Financing objective adopted for investigation The financing objective I have adopted for this investigation is to maintain the value of the Fund s assets at least: 100% of accumulation account balances plus 105% of defined benefit vested benefits (with Company consent). Accumulation account balances are matched by specific assets and do not require any additional margins. However, the defined benefit liabilities are not necessarily linked to the returns on the underlying assets. A margin in excess of 100% coverage is therefore desirable to provide some security against adverse experience such as poor investment returns. I consider that the target margin of 5% strikes a suitable balance between the Trustee s desire to provide security to members and the Company s desire to avoid an unnecessary build-up of surplus. Given that the Fund is currently under-funded against this objective, the contribution program that has been recommended is aimed at achieving this coverage in three years time. The target margin of 5% is higher than the target adopted for the 30 June 2008 investigation of 4% due to the greater influence of salary related benefits for an ageing membership. Based on the assumptions adopted for this investigation, achieving the financing objective of 105% of vested benefits (consent) would also result in greater coverage of the actuarial value of accrued benefits and a healthy margin of coverage of the SG Minimum Benefits. Hence, it is not considered necessary to adopt specific financing objectives in relation to these benefit liability measures. 3

1.4 Main items of Fund experience The coverage of defined benefit vested benefits (with Company consent) has reduced since the previous actuarial investigation from 101.1% as at 30 June 2008 to 99.7% at 30 June 2011. However, this is slightly in excess of the coverage projected at the 30 June 2008 investigation. The significant factors affecting the Fund s financial experience during this period are shown below. Item Fund experience Comment on effect Investment returns (after tax and investment fees) Salary increases Company contributions 0.1% per annum 3.9% per annum As recommended slightly positive the rate of earnings on investments was slightly higher than the previous assumption of -1.5% per annum (based on an assumed return of -15.2% for 2008/09 and long term returns of 6.3% per annum.) Slightly favourable salary related benefits increased at a lower rate than the previous long term assumption of 4.0% per annum. Favourable contributions were greater than the long term cost of accruing defined benefits, but were reduced during 2011 relative to the recommendation from the 2008 investigation. Section 2 provides further details of Fund membership, assets and experience. 1.5 Recommended contribution rates Based on the results of this actuarial investigation, I recommend that the Company makes contributions to the Fund as follows: For the year from 1 July 2011 to 30 June 2012 nil in respect of Category B members nil in respect of Category C members 23.0% of Category D1 members salaries 23.0% of Category D2 members salaries 17.0% of Category D3 members salaries, For the period 1 July 2012 to 30 June 2014 nil in respect of Category B members nil in respect of Category C members 27.0% of Category D1 members salaries 27.0% of Category D2 members salaries 21.0% of Category D3 members salaries, 4

The contributions rates include an allowance for deemed/salary sacrifice member contributions in relation to Categories D1 and D2. Contributions for any excess of Ordinary Time Earnings (OTE) over Fund Salary in relation to 9% SG entitlements are also payable and are applied to a separate accumulation account. The recommended level of Company contributions is expected, on the basis of the assumptions adopted for this investigation, to restore the Fund to a satisfactory financial position and meet the financing objective over the period to 30 June 2014. This is illustrated in the following section. Once an adequate margin of assets over vested benefits is re-established, I expect that the required level of Company contributions will be reduced. The timing and amount of the adjustment will depend on the Fund s actual experience. 1.6 Projection of coverage of accrued benefit liabilities I have prepared a projection of Fund assets and benefit liabilities based on the actuarial assumptions adopted for this investigation; but allowing for known investment experience since 30 June 2011 (an investment return for the 10 months immediately after 30 June 2011 of 0.5% for the period), and assuming that the Company contributes on the basis as recommended above. The results of that projection are as follows: Projected Coverage of Benefits (Defined Benefit Liabilities Only) 110% 105% 100% 95% 90% 85% 2011 2012 2013 2014 2015 2016 30 June Vested Benefits index Actuarial Value of Accrued Benefit index VB Financing Objective This chart shows that, under the projection prepared (based on the assumptions adopted and the contributions as recommended), projected Fund assets will cover projected vested benefits (consent) within the first year after the investigation date, and Fund 5

assets will approach the Actuarial Value of Accrued Benefits over the period following the investigation date. The graph also shows that the coverage of vested benefits (consent) will reach the financing objective coverage of 105% of assets to vested benefits (consent) by 30 June 2014. The coverage level of assets compared with the actuarial value of accrued benefits is also shown. 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 Fund 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 Fund s financial position. Also note the monitoring program recommended in Section 1.9.5. Sections 1.8 (below) and 3.7 provide an illustration of the impact of investment volatility on the projected coverage of vested benefits (consent). 1.7 Key risks There are a number of risks relating to the operation of the Fund. The more significant financial risks relating to the defined benefits are: Investment risk borne by the Company. The risk is that investment returns will be lower than assumed and the Company will need to increase contributions to offset this shortfall. For example, if the assumed future investment return was reduced by 1% pa with no change in other assumptions, we expect that the actuarial value of accrued benefits would increase by $155,130 (Company funding cost impact $155,130 /0.85 = $182,506), with a resulting reduction in the coverage of the actuarial value of accrued benefits from 91.8% (as per the table in Section 1.2) to 89.5%. Another way of looking at this risk is that an additional Company contribution of around 2.0% of annual salaries (with allowance for contributions tax) would be required to offset the negative impact on past and future service liabilities of a 1% shortfall in investment returns. The actual investment return achieved by the Fund 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 few years. 6

Salary growth risk borne by the Company. 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 company contributions. For example, if the assumed future salary increase rate was increased by 1% pa with no change in other assumptions, we expect that the actuarial value of accrued benefits would increase by $138,658 (Company funding cost impact $138,658 /0.85 = $163,127), with a resulting reduction in the coverage of the actuarial value of accrued benefits from 91.8% (as per the table in Section 1.2) to 89.7%. 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 2013-2019. This investigation assumes the SG rate remains at 9% as the impact of the change on the level of benefits in the Fund will need to be discussed with the employer. Changes arising from the Cooper Review of Australia s Superannuation System may also have some impact. The Fund s Risk Management Statement and Risk Management Fund should identify a full range of risks faced by the Trustee. 1.8 Illustration of potential investment volatility The Fund 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 (consent) being below 100% in three years time (i.e. lower than the financing objective adopted for this investigation). The projection shown below indicates that, in three years time, there is an 80% chance that coverage of vested benefits (consent) will be in the range of 103% to 106%. Please refer to Section 3.7 of this report for further details. 7

110% Projected Coverage of Vested Benefits (Defined Benefit Liabilities Only) 105% 100% 95% 90% 85% 2011 2012 2013 2014 2015 2016 30 June Valuation Assumptions Low Return Scenario High Return Scenario VB Financing Objective Given the possibility that coverage of vested benefits may fail to improve, it will be necessary for the Trustee to monitor experience and coverage levels regularly during the period to the next investigation so that, in the event of adverse experience, any corrective action considered appropriate can be implemented in a timely manner. The Fund 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 Fund s financial position. Recommendations on the monitoring process are set out in Section 1.9.5. 1.9 Other statements and recommendations 1.9.1 Investment policy The current defined benefit investment policy has the potential for substantial variability in investment returns. The projections carried out as part of this actuarial investigation indicate that the majority of the defined benefit assets start to wind down over the next 10 years. The nature of the Fund 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 a shorterterm liability profile reduces the ability of the Fund 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. A review of the investment policy may be appropriate, with consideration to be given to moving part or all of the defined benefit assets to a lower risk strategy, should the Company wish to reduce the potential for volatile contribution requirements. 8

We can prepare additional information to assist the Trustee and Company in considering a change in investment strategy, including assessing the expected impact on the Company contribution rate and on the variability of the financial position, if required. Please refer to Section 4.3 for further information and commentary. 1.9.2 Crediting Policy A detailed review of the unit pricing and crediting policy is outside the scope of this investigation. While I consider that the main features of the unit pricing and crediting policy are generally suitable, we believe that the Fund's operational and risk management framework would benefit from enhancing the existing documentation of the policy and the associated controls and procedures. Please see section 4.4 for further details. 1.9.3 Insurance I consider that the Fund s current insurance arrangements are suitable and provide adequate protection for the Fund. Section 4.5 of the report provides further details. 1.9.4 Requirements due to unsatisfactory financial position Section 130 of the SIS Act requires that if an actuary forms the opinion that a Fund 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 apply, as I am of the opinion that, due to poor investment returns since 1 July 2011, assets will have fallen to less than the vested benefits (regardless of whether or not the Company grants consent for early retirement benefits). I have made the necessary notifications to both APRA and the Trustee in my letter dated 25 January 2012. 1.9.5 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 Fund s investment return. I recommend that the progress of the Fund s coverage of vested benefits be reviewed after each annual administration review of the Fund to ascertain if an adjustment to the Company s contribution levels is required prior to the next complete actuarial investigation. 9

The Trustee should also continue to monitor the Notifiable Events specified in the Fund s Funding and Solvency Certificate and advise the Actuary should any actual or potential Notifiable Events occur. 1.10 Additional information Significant events since the investigation date The recommendations take into account the actual investment return of 0.5% for the 10 months immediately after 30 June 2011. I am not aware of any other significant events that have occurred since 30 June 2011 which I have not already taken into account, which would have a material impact on the recommendations in this report. Next actuarial investigation - Required at a date no later than 30 June 2014. At that time, the adequacy of the Company contribution levels will be reassessed. Note that the monitoring process recommended in Section 1.9.5 may lead to an earlier reassessment ahead of the next full actuarial investigation. Next Funding and Solvency Certificate required at or before the expiry of the current Funding and Solvency Certificate (which expires on 23 December 2016). Next Benefit Certificate required at or before the expiry of the current Benefit Certificate (which expires 30 June 2013). This certificate is required primarily by the Company to demonstrate compliance with its Superannuation Guarantee obligations to employees who are members of the Fund. However the Trustee must ensure the benefits paid from the Fund are not lower than the minimum benefits specified in the Benefit Certificate. Actuarial advice on the implementation and any impact of the increase in the SG rate should be sought before preparation of the new certificate. 1.11 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 Company to contribute in line with the recommendations. The Trustee should continue to monitor the contribution requirements under the Fund s Funding and Solvency Certificate and seek contributions from the Company as appropriate. Note that if contributions paid are lower than recommended, the SIS legislation requires 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. 10

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 investigation report should not be relied upon for any other purpose or by any party other than the Trustee of the Fund and the Company who contributes to the Fund. 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 Fund s financial condition at a particular point in time, and projections of the Fund s estimated future financial position based on certain assumptions. It does not provide certainty in relation to a Fund s future financial condition or its ability to pay benefits in the future. Future funding and actual costs relating to the Fund are primarily driven by the Fund s benefit design, the actual investment returns, the actual rate of salary inflation and any discretions exercised by the Trustee or the Company. The Fund s actuary does not directly control or influence any of these factors in the context of an actuarial investigation. The Fund s future financial position and the recommended Company contributions depend on a number of factors, including the amount of benefits the Fund pays, the cause and timing of member withdrawals, fund 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 investigation 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 Fund 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 11

those assumptions would be different. For this reason this report also shows the impact on the likely contribution requirements/funding levels if one alternative set of assumptions were to be adopted. Actuarial assumptions may also be changed from one investigation to the next because of mandated requirements, Fund 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 Fund 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 investigation results. Data and Fund Provisions To prepare this report, we have relied on financial and participant data provided by the Fund 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 Fund as provided by the Trustee. The Trustee is ultimately responsible for the validity, accuracy and comprehensiveness of this information. If the data or Fund provisions are not accurate and complete, the investigation 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... Stuart Mules Fellow of the Institute of Actuaries Representative of Consulting (Australia) Pty Ltd AFS Licence #411770 17 May 2012 12

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 Representative of Consulting (Australia) Pty Ltd AFS Licence #411770 13

2 Membership, assets and experience This section provides membership and asset information and summarises the principal elements of Fund experience since the last actuarial investigation. 2.1 Membership Data 2.1.1 Membership summary The Fund is a defined benefit fund providing lump sum benefits and is closed to new members. The table below shows a summary of the defined benefit members as at 30 June 2011: Category Number of Members Average Age Annual Salary B 14 57.8 $692,000 C 10 52.7 $525,000 D1 & D2 10 52.9 $1,445,000 D3 7 44.4 $524,000 Total 41 53.1 $3,186,000 In addition, there were two members eligible for a late retirement accumulation only benefit. The membership data used for this investigation was taken from the database used to administer the Fund. We have been advised by the Fund administrator that the crediting rate had been understated for the 2009/10 and 2010/11 financial years and that an adjustment will be made to the crediting rate from 1 July 2011. For the purposes of this actuarial investigation, I have made allowance as at 30 June 2011 for an estimate of the adjustment to the amount of interest credited to members accounts. This has increased the amount of vested benefits. Our calculations also take into account a significant backdated salary increase for one member effective from 1 January 2011. 14

I have carried out some broad reasonableness checks on the data and am otherwise satisfied with the quality of the data and its suitability for this purpose. 2.1.2 Age profile The split by age of the defined benefit membership as at 30 June 2011 is shown in the following graph: Defined Benefit Member Age Distribution at 30 June 2011 Number 4 Number Cumulative % age 3 2 1 100.0% 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% Percentage 0 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 Age 0.0% 2.2 Assets The net market value of the Fund s assets as at 30 June 2011 amounted to $5,965,000 based on the unaudited data provided by the Fund s administrator. Additional accumulation account balances (member AVC, company AVC and surcharge) and the accumulation benefits for late retirees totalled $436,000, leaving assets of $5,529,000 to support the defined benefit liabilities. This value has been used for the purposes of the investigation. 2.3 Experience 2.3.1 Investment returns Based on the changes in unit price and a 1.21% per annum asset-based administration fee rebate, I estimate that the rate of investment earnings (after tax, investment fees and asset based administration fees) on assets supporting defined benefits has averaged 0.1% per annum over the period of the investigation. At the previous investigation, it was assumed that returns for 2008/09 would be -15.2% followed by long term investment returns of 6.3% per annum. This resulted in an assumed investment return for the period of -1.5% per annum. The higher than expected investment return had a positive impact on the Fund s financial position. The crediting rate is based on the investment earning rate but without a deduction for asset based administration fees of 0.29% of assets. The Company ultimately finances the asset based administration fee via contributions to meet the defined benefit liabilities. 15

2.3.2 Salary increases Salaries for defined benefit members increased by an average of 3.9% pa over the period compared to our longer term assumption at the last actuarial investigation of 4.0% pa. The slightly lower than assumed salary increases had a small positive impact on the Fund s financial position. 2.3.3 Contributions The Company contribution rates over the 3-year review period, in accordance with the prior actuarial investigation and subsequent contribution recommendations were: For the year from 1 July 2008 to 30 June 2009 nil in respect of Category B members nil in respect of Category C members 21.0% of Category D1 members salaries 21.0% of Category D2 members salaries 15.0% of Category D3 members salaries, For the period from 1 July 2009 to 31 December 2010 nil in respect of Category B members nil in respect of Category C members 29.6% of Category D1 members salaries 29.6% of Category D2 members salaries 23.6% of Category D3 members salaries, For the period from 1 January 2011 to 30 June 2011 nil in respect of Category B members nil in respect of Category C members 23.0% of Category D1 members salaries 23.0% of Category D2 members salaries 17.0% of Category D3 members salaries, The contributions rates include an allowance for deemed/salary sacrifice member contributions in relation to Categories D1 and D2. Separate additional contributions are made for any excess of Ordinary Time Earnings (OTE) over Fund Salary in relation to the 9% SG requirement. The Company contributions paid over the review period were higher than the estimated long term cost of benefits accruing in future. As expected, this has had a positive impact on the Fund s financial position. These contributions were recommended based on a target level of coverage of vested benefits in the shorter term. 16

2.4 Change in financial position since previous investigation The table below shows the coverage of assets over liabilities as at 30 June 2011 and the corresponding values at the previous investigation date. Coverage of Defined Benefits by Assets 30 June 2011 30 June 2008 Vested Benefits (no consent) 100.3% 105.8% Vested Benefits (consent) 99.7% 101.1% Retrenchment 96.0% 97.7% Actuarial Value of Accrued Benefits 91.8% 98.6% As expected, the coverage has declined since the previous investigation with the main reason for the change being an average investment earning rate of 0.1% per annum. This outweighed the favourable impact of lower than expected salary increases and experience and Company contributions in excess of the long-term cost of future accruing benefits. However, it is important to note that the coverage of vested benefits (with Company consent) as at 30 June 2011 is slightly in excess of the coverage projected at the 30 June 2008 investigation. 17

3 Investigation 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 Fund assets and benefit liabilities on the basis of actuarial assumptions about future experience. These assumptions include investment returns, salary increases, crediting rates, rates at which members cease service for different reasons, and various other factors affecting the financial position of the Fund. 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 3.1.1 Provisions of the Trust Deed The rules of the Fund include requirements that: the Trustee ensures an actuarial investigation of the Fund is conducted when required by legislation. Accordingly actuarial investigations are carried out at three yearly intervals at a minimum; and The Company must contribute at the rate determined by the Trustee, after consulting the Company, on the advice of the Actuary to the Fund. 18

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 5.5.4 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 (consent) entitlement. 3.2 Financing the benefits 3.2.1 Ultimate cost of providing Fund benefits The ultimate cost to the Company of providing Fund benefits is: the amount of benefits paid out; plus the expenses of running the Fund, including tax; less members contributions; and the return on investments. The ultimate cost to the Company will not depend on the actuarial investigation assumptions or methods used to determine the recommended Company contribution rate, but on the actual experience of the Fund. The financing method and actuarial assumptions adopted will however affect the timing of the contribution requirements from the Company. 19

3.2.2 Financing method There are various financing methods that could be followed in setting the Company contribution level. This investigation uses a Target Funding method. Under this method, the Company contribution rate required to provide a target level of coverage of a particular benefit liability measure is determined. For this Fund, the target coverage measures are detailed in Section 1.3 of this report. Under this method of financing, the level of the Company contribution may vary from time to time to ensure that the Fund remains on course towards the financing objectives. The Target Funding method was also adopted at the previous investigation. I consider that the Target Funding method is suitable in the Fund s current circumstances as it allows the recommended contribution rate to be determined specifically to meet the Fund s financing objective. 3.3 Actuarial assumptions 3.3.1 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. The key economic long term assumptions adopted for this investigation are: Long Term Assumption (% pa) Investment returns (after tax, asset-based 6.3% administration fees and investment fees) # Crediting rates 6.6% General salary increases 4.0% # in the projections of Fund 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 10 months since 30 June 2011. An effective return of 1.5% has been assumed for 2011/12. The assumption for investment returns is based on the expected long-term investment return for the Fund 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. 20

The Fund s current crediting rate policy is assumed to continue, whereby the current asset based administration fee of 0.29% pa is not applied to the crediting rate. The general salary increase assumption is based on long term economic forecasts for future increases in average weekly earnings (AWOTE), together with expectations for the future salary increases of Fund members based on discussions with the Company. 3.3.2 Other assumptions New members The Fund is closed to new entrants. No allowance has been made for new members. Expenses Based on recent experience, administration and disability income insurance costs for defined benefit members are assumed to average 0.5% of defined benefit members salaries. In addition, an allowance for consulting costs of $10,000 per annum has been assumed to recognise that these costs will continue to be incurred, irrespective of the number of members remaining in the Fund. Tax It is assumed that the current tax rate of 15% continues to apply to the Fund s assessable income, along with current tax credits and other concessions. All future Company 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 Fund crediting rate. Surcharge was abolished with effect from 1 July 2005. No allowance has been made for excess contributions tax, as this is payable by the member and cannot be met from defined benefits. Resignation, Death and Disablement I have maintained the same assumptions in relation to rates of resignation, death and total and permanent disablement (TPD) as were adopted at the 30 June 2008 actuarial investigation. Given the small size of the Fund, these are based on the experience of similar funds administered or advised by. Examples of the assumed rates are set out below. 21

Age Resignation (%) Death (%) TPD (%) 30 7.1 0.06 0.02 35 4.6 0.08 0.03 40 3.8 0.11 0.06 45 2.9 0.19 0.13 50 1.7 0.32 0.29 55-0.54 0.62 60-0.91 1.30 Retirement It is assumed that Company consent is granted for early retirement, where required. I have maintained the same assumptions in relation to the rates at which members retire. Given the small size of the Fund, these are based on the experience of similar funds administered or advised by. The assumed rates are set out below. Age Retirement (%) 55 20 56 59 5 60 20 61 15 62 15 63 20 64 50 65 100 Retrenchment No allowance is made for the possibility of future retrenchments. Superannuation Guarantee (SG) rate The Government has legislated an increase in the SG rate from 9% to 12% over the period 2013-2019. This investigation assumes the SG rate remains at 9% as it is necessary to obtain the employer s view on the application of this increase. Actuarial advice on the implementation and any impact of the change should be obtained. Value of Assets For the purpose of the investigation, the value placed on the assets was determined as set out in Section 2.2. 22

3.3.3 Changes in assumptions since the previous investigation The assumptions adopted at this investigation are the same as those used in the previous investigation. 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 Investigation 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. Item Present Value of future defined benefits payments in respect of membership accrued at investigation date Present Value of future defined benefits payments in respect of membership after investigation date Present Value of future Fund operating costs and tax on contributions Total Present Value of future payments out of Fund Actuarial Value on Main Assumptions $000s 6,023 1,908 633 8,564 Value of Fund Assets at 30 Jun 2011 5,529 Present Value of future Company contributions (at recommended rates) Present Value of future Member contributions (at rate(s) specified in Trust Deed) Total available Assets (in absence of other contributions) 3,446 273 9,248 Excess/(Deficit) of Assets to value of benefits 684 The investigation results indicate that the recommended contribution rates are expected to be more than sufficient to finance future benefit payments if future experience 23

matches the assumptions in the long-term. However, I have recommended that higher contributions be made for the time being to take into account the financing objectives and to create a buffer against adverse experience. 3.6 Contribution requirements Based on the results of this actuarial investigation, I recommend that the Company makes contributions to the Fund as follows: For the year from 1 July 2011 to 30 June 2012 nil in respect of Category B members nil in respect of Category C members 23.0% of Category D1 members salaries 23.0% of Category D2 members salaries 17.0% of Category D3 members salaries, For the period 1 July 2012 to 30 June 2014 nil in respect of Category B members nil in respect of Category C members 27.0% of Category D1 members salaries 27.0% of Category D2 members salaries 21.0% of Category D3 members salaries, The contributions rates include an allowance for deemed/salary sacrifice member contributions in relation to Categories D1 and D2. Contributions for any excess of Ordinary Time Earnings (OTE) over Fund Salary in relation to 9% SG entitlements are also payable and are allocated to a separate accumulation account. The recommended level of Company contributions is expected, on the basis of the assumptions adopted for this investigation, to restore the Fund to a satisfactory financial position and meet the financing objective over the period to 30 June 2014. This is illustrated in the following section. Once an adequate margin of assets over vested benefits is re-established, I expect that the required level of Company contributions will be reduced. The timing and amount of the adjustment will depend on the Fund s actual experience. 3.7 Investment volatility I have considered the impact of investment volatility on the Fund 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 Fund s defined benefit investment strategy. Using the investment return model and assumptions adopted, there is approximately only a 10% chance of the Fund s cumulative investment return being less than the low 24

return scenario. Similarly, there is approximately only a 10% chance of the Fund s cumulative investment return being greater than the high return scenario. Allowance has been included for a 0.5% return during the 10 month period immediately following 30 June 2011. 1 July 2011 to Assumed Cumulative Investment Return (%) 30 June "Low Return" Investigation "High Return" 2012-1.4% 1.5% 4.4% 2013-1.9% 7.9% 18.1% 2014 1.9% 14.7% 28.3% 2015 6.8% 22.0% 38.4% 2016 12.2% 29.6% 48.9% The cumulative investment return is the total return from 1 July 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 investigation. The extent of variation allowed for in these projections reflects the Fund 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 (consent) for defined benefit members under the high return and low return scenarios, with all other investigation assumptions remaining unchanged. 110% Projected Coverage of Vested Benefits (Defined Benefit Liabilities Only) 105% 100% 95% 90% 85% 2011 2012 2013 2014 2015 2016 30 June Valuation Assumptions Low Return Scenario High Return Scenario VB Financing Objective The Fund s financial position is sensitive to changes in the investment returns and is more sensitive to downside investment risk than upside risk. 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 25

assets over vested benefits (consent) at 30 June 2014 will fall in the range from 103% to 106%. 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 improvement in level of security over the next few years if the Company contributes at the recommended levels. However, given the sensitivity of the Fund s financial position to future experience, I have recommended in Section 1.9.5 that regular monitoring of the Fund 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. It is also noted that Section 1.7 includes an illustration of the effect on the actuarial value of accrued benefits and the estimated company cost of future service benefits of assuming a lower long-term earning rate. 26

4 Fund design and policies This section outlines the main characteristics of the Fund, including the design of the defined benefits, investment policy, crediting policy and insurance arrangements. 4.1 Background information The Fund is operated for the benefit of employees of Monroe Australia Pty Ltd and is a part of Spectrum Super, a division of IOOF Portfolio Service Superannuation Fund. The Trustee of the Fund, IOOF Investment Management Limited, holds a Registrable Superannuation Entity Licence under the SIS legislation and operates the Fund as required under the Trust Deed. This report is provided for the Trustee and presents the results of the actuarial investigation of the Fund as at 30 June 2011. 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 Stuart Mules, on behalf of, and the results are contained in a report dated 23 June 2009. The Fund is a resident regulated fund and a complying superannuation fund for the purposes of the SIS legislation. The Fund 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. 27

4.2 Summary of benefits The governing rules of the Fund are set out in the IOOF Portfolio Services Superannuation Fund trust deed dated 20 June 1994 (as amended). Full details of the benefit provisions of the Fund are contained in the application to participate and the benefits specification for the Fund. A summary of these provisions is set out below. References should be made to the formal governing documents for definite statements. Category D Members Normal Retirement Age Final Average Salary (FAS) Normal Retirement Benefit 65 The average of the annual rates of salary on the three review dates preceding Normal Retirement Age. For benefits calculated before Normal Retirement Age, the Final Average Salary is calculated prospectively, assuming that the rate of salary remains unchanged. Thus, for members more than three years from their Normal Retirement Age, the Final Average Salary is the annual salary at the preceding review date. The benefit is a lump sum expressed as a multiple of the member s final average salary. The multiple is calculated as 15% for each year of service classified as a non- Executive, and 17.5% for each year of service classified as an Executive. Lower levels of benefits existed before 1 January 1988. A minimum benefit equal to the resignation benefit applies for each member. Early Retirement Benefit A member may retire at any time within 10 years of normal retirement, with company consent required before age 60, other than for female members who joined before 1 January 1988. The benefit is a lump sum based on the member s final average salary and period of service completed at the date of actual retirement, discounted by compound interest of 3% per annum for the period remaining to normal retirement or the member s 40 th anniversary of commencing service, whichever is earlier. A minimum benefit equal to the resignation benefit applies for each member. Late Retirement Benefit A member who retires or ceases service after normal retirement will receive their normal retirement benefit increased with compound interest (at the declared rate) to the date of late retirement. Members who joined before 1 January 1988 receive a minimum average rate of 4% on this benefit. 28

Death Benefit Disablement Benefit The benefit is a lump sum equal to the retirement benefit that would have been paid had the member continued in employment until normal retirement, with an unaltered salary. A member who becomes totally and permanently disabled will receive a lump sum benefit determined in the same manner as the death benefit. An Executive member who becomes totally but temporarily disabled will receive a benefit of 75% of salary payable in monthly instalments. The benefit is payable after a 3 month waiting period for a maximum of 24 months. This benefit is insured within the Fund. Other members are entitled to a monthly income benefit which is calculated as 1/12 of one eighth of the death benefit. This benefit is insured within the Fund. Resignation Benefit The benefit is a return of the member s contributions to the Fund, increased with interest at the declared rate (with a 4% per annum average compound minimum rate applying since 1 January 1988 for members at that date). This amount is increased by a Vesting Factor equal to 155% of the member account. Retrenchment Benefit A lump sum benefit payable to a member who ceases employment as a result of retrenchment, sickness or accident. The retrenchment benefit is equal to the greater of the early retirement and resignation benefits. Superannuation Guarantee Members' Contributions Voluntary Contributions Benefits are subjected to a minimum of the Minimum Requisite Benefit specified in a Benefit Certificate dated 20 December 2008. Members contribute at 5% of salaries. For Category D1 and D2 members, the Company makes these contributions on behalf of them and the contributions are said to be deemed for benefit purposes. Some members have chosen to have their member contributions paid via salary sacrifice. Voluntary contributions are accumulated with the interest, and are payable in addition to the normal benefits. 29

Category B Members Benefits for Part B members are made up of two components a defined benefit component and a dollar related component. Defined Benefit Component These benefits operate in a similar manner to those for Category D members with the following variations. From 7 July 2008, all contributions and accruals for Category B members benefits were frozen. Final Average Salary (FAS) Normal Retirement Benefit The average of the annual rates of salary in the preceding five years. The multiple is calculated as 6.25% for each year of membership. Resignation Benefit The Vesting Factor is equal to 20% per annum for each complete 5 year period of membership, up to 100% after 25 years. Retrenchment Benefit A discount rate of 1% per annum is used in lieu of the 3% per annum discount on early retirement. Members' Contributions Members contributed at 2.5% of salaries. "Dollar Related" Component This component is payable only on retirement with more than 10 years of service, and is subject to the standard rates of discount for early retirement. The component payable on normal retirement is calculated as: Service before 1 January 1979 Service after 1 January 1979, and before 1 March 1981 $150 for each year (months count as fractions of a year). $300 for each year (months count as fractions of a year). Category C Members These benefits operate in a similar manner to the dollar related component for Category B members with the following variations: Service after 1 March 1981 Early Retirement Benefit $300 for each year (months count as fractions of a year). No discount is applied but consent is required prior to normal retirement. 30

The Superannuation Guarantee (Administration) Act 1992 This Act requires companies 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 Fund 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 2013-2019. This investigation assumes the SG rate remains at 9% as it is necessary to obtain the employer s view on the application of this increase. Actuarial advice on the implementation and any impact of the change should be obtained. 31

4.3 Investment policy Assets backing accumulation benefit liabilities The Fund provides members with a range of investment options for accumulation benefits. The assets supporting the accumulation balances 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, these accumulation liabilities and related assets are matched. The Fund s investments are expected to provide a high level of liquidity in normal circumstances. I consider that the Fund s investment policy for assets relating to accumulation liabilities is suitable, having regard to the nature and term of these liabilities. Assets backing defined benefit liabilities The Fund s investment strategy for assets supporting defined benefit liabilities, the IOOF Multimix Balanced Growth Trust, currently involves a benchmark 72% exposure to growth assets such as shares and property and a benchmark 28% exposure to defensive assets such as cash and fixed interest (refer to table below for actual and 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. Actual Asset Allocation Alternatives, 7.6% Overseas Fixed Interest, 7.8% Cash, 10.0% Australian Shares, 29.7% Australian Fixed Interest, 7.8% Property, 8.1% Overseas Shares, 29.0% 32

Benchmark Asset Allocation Overseas Fixed Interest, 11.0% Alternatives, 10.0% Cash, 3.0% Australian Shares, 30.0% Australian Fixed Interest, 11.0% Property, 10.0% Overseas Shares, 25.0% The retirement benefits are not typically affected by the investment return on the Fund s assets being based on salary and service. However, the resignation benefits and SG minimum benefits are affected by the investment return. The volatility of the Fund s investment returns will affect the financial position of the Fund from year to year (refer illustrations in section 3.7) and is likely to impact on the required level of Company contributions (refer illustration in section 1.7). Given that it is not known when members will take their benefit with certainty, the exact term of the Fund s liabilities is unknown. However, the projections carried out as part of this actuarial investigation indicate that the majority of the defined benefit assets start to wind down over the next 10 years. The Fund s investments are expected to provide a high level of liquidity in normal circumstances. Hence we do not envisage any problem in being able to redeem assets to meet benefit payments as they arise. However, the reducing expected term of the liabilities reduces the ability of the Fund to ride out the ups and downs in returns that are expected from investment strategies with substantial exposure to growth assets. Taking into account the Fund s financial position and the nature and term of the Fund s defined benefit liabilities, I consider that the current defined benefit investment policy remains a suitable policy provided that the Company accepts the likely volatility in investment returns and is prepared to make additional contributions if returns are unfavourable. A review of the investment policy may be appropriate, with consideration to be given to moving part or all of the defined benefit assets to a lower risk strategy, should the Company wish to reduce the potential for volatile contribution requirements. We can prepare additional information to assist the Trustee and Company in considering a change in investment strategy, including assessing the expected impact on the Company contribution rate and on the variability of the financial position, if required. 33