CEO Online

Welcome to the fifth edition of CEO Online

As the financial year has just ended, many members may be thinking about their Scheme’s investment returns and the resulting crediting rate.

The CSS crediting rate will not be finalised until August, but I wanted to advise members that it is virtually certain we will be announcing a zero crediting rate for the 2001/2002 year.

If you have been keeping an eye on the news, you will be aware that many superannuation funds will be reporting negative investment returns for the year to 30 June 2002. The CSS long-term investment strategy anticipates the likelihood of a negative return on average once every five years. Yet, this is only the first time, since its inception in 1976, that the Scheme will be announcing a zero crediting rate.

As a CSS member you are protected from negative returns and therefore your super savings will not be eroded.

CSS MEMBERS ARE PROTECTED FROM A NEGATIVE CREDITING RATE

The CSS Fund is ‘capital protected’. This means that the governing legislation prohibits the application of negative interest rates to the amounts credited to members, even when investment performance has been below zero.

SHORT-TERM IMPACT FOR MEMBERS

It is important you understand the short-term impact of a zero crediting rate on your superannuation:

If you are a contributing member

The member and productivity (if any) components of your benefit will not earn any interest for the last financial year. However, your pension, the major portion of your retirement benefit, is determined by your final salary, length of membership and age at exit, and therefore is not affected by investment performance.

If you are a deferred member

The member and productivity components of your benefit will not earn any interest for the last financial year. The pension component of your benefit is based on your member contributions, which have now ceased. However your total benefit is protected from a negative crediting rate and will not be eroded.

REMEMBER SUPER IS ABOUT THE LONG TERM

Superannuation is a long-term investment. Even with a zero crediting rate this year, the CSS 5-year average crediting rate is still strong at 8.0% as is the 10-year rate at 8.4% (for the financial year ended 30 June 2002).

The graph shown here illustrates how your Scheme has been performing against the CPI over the last 5 years.

HOW THE RESERVE WORKS

The Board has a reserving policy to help smooth out fluctuations in annual crediting rates. In years where there are high returns part of the investment earnings are transferred to the Reserve, thereby reducing the rate credited to members. In years where there are poor or negative returns, the Reserve is used to top up the interest rate credited to members.

Unfortunately the Reserve at the start of the 2001/02 financial year was zero. This means that there are no current reserves to offset the negative earning rate. This also means that when positive investment earnings return, crediting rates will be lower than investment earnings to rebuild the Reserve.

BUT EVEN THE BANK GIVES ME 4%!

Some members have said that they can’t understand how the CSS can be earning negative “when even the bank gives me 4%”.

Many superannuation funds are showing negative returns this year. An investment strategy which aims to maximise long-term returns includes an element of risk. The Board’s strategy anticipates the likelihood of a negative return on average once every five years.

It is possible to have an investment strategy that is virtually risk free – that will never have a negative year. However, if the Board had invested with such a strategy then there would have been around a 3.9% return this year, BUT the accumulated return over the last five years would have only been 24% compared to the accumulated CSS crediting rate of 33.8%.

Whilst a short-term negative return is disappointing, particularly for people who had planned on a positive return, the Board’s investment strategy is designed with a view to the long-term, not a one-year time horizon.

WHY DID WE RETURN A NEGATIVE?

It has been a challenge for most superannuation funds to meet investment objectives in what is currently a volatile market. As explained below, the Board diversifies investments over different categories, such as Australian and international shares, property and cash.

The Australian share market for the financial year ending 30 June 2002 (as represented by movements in the S&P ASX 200 index) was negative 4.7%. The international shares market for the financial year ending 30 June 2002 (as represented by movements in the MSCI World ex-Australia Unhedged Index) was negative 23.5%.

The end result is that the CSS investment return will be approximately 6.4% negative (-6.4%). However, as a CSS member you are protected from a negative crediting rate and your super savings will not be eroded.

DIVERSIFICATION OF INVESTMENTS

The Fund’s overriding investment objective is to maximise real returns while minimising risks relative to those investments. In choosing its investments the Funds has established a long term, strategic asset allocation that takes into account specific risk and return objectives against which the Board can judge its investment activity.

The Australian share market is very small. Listed Australian companies represent less than 2% of global investment opportunities. The Fund could not meet its investment objective by limiting the application of its investment strategy to the relatively small Australian investment market place.

The international marketplace provides access to investment opportunities that are not available within the Australian market and in which investment is advantageous.

A key benefit in mixing both Australian and international investments is that combining the two achieves a better risk/return trade-off than either of them could achieve alone. The combination of Australian and international investment results in reduced risk and the smoothing of volatility in the portfolio and is a powerful strategic tool in fund investment.

INVESTMENT REVIEWS

The Board formally reviews its investment strategy every year, and has a major review every three years. During that review, the Board determines the best strategy to adopt in the expected investment climate.

The Board currently is undertaking that three-year review and will be reporting to members on its findings in the next month or so. The details of the investment strategy for the next three years will then be posted in this section of the CSS web site.

Given the many well-publicised difficulties of the current investment climate, it is more important than ever for the Board to pursue its investment goals carefully.

FURTHER INFORMATION

Additional information on investment performance is always available to you via this website or call a CSS Information Officer on 1300 000 277

For information about asset allocation, you can contact my office on (02) 6263 6999 or via email on secretary@aria.gov.au

We understand that if your retirement is imminent, your outlook is more short term. If you are planning on retiring in the next 12 months, please call one of our CSS Information Officers on 1300 000 277 for a detailed estimate of your benefit.

For longer-term projections you can go to Member Services Online on this web site and use the i-Estimator. Remember you will need your Access Number to use the i-Estimator. If you do not have, or have lost, your Access Number, you can download an Access Number application form from Member Services Online.

I look forward to reporting to you again in August.

ps. Don’t forget, if you have not already done so, please supply your preferred mailing address to our administrator ComSuper so we know where to send your annual member statement and report this year. This is very important if you have moved or changed jobs in the last year. You can update your address via Member Services Online (if you have an active Access Number) or by calling a CSS Information Officer on 1300 000 277.