CEO Online
IMPORTANT REMINDER: If you have moved since last year, please provide your current postal address to our administrator ComSuper by 7 August (simply call 1300 000 277) so we know where to send your annual member statement and report this year.
Welcome to the sixth edition of CEO Online
The investment returns (earning rate) for the 2001/2002 financial year have now been finalised and the resulting crediting rate is zero.
This is disappointing but, as I reported to you in July, not a surprise given the investment market decline in Australia and overseas.
The actual earning rate for the 2001/2002 year is negative 5.1% (-5.1%) but remember that as a CSS member you are protected from negative crediting rates.
The long-term performance of the CSS is still strong, as you can see by the graph below, with a 5-year average crediting rate of 8% and a 10-year rate of 8.4%, significantly above inflation and bank returns.
HOW OFTEN IS THIS LIKELY TO HAPPEN?
The CSS Board anticipates that investment returns may be negative about one year in five. However, as this is an average projection, negative returns may occur more than once in any five-year period or not at all. For example, the last time the CSS experienced a negative return was in 1990/91. What is more important is that the Scheme’s long-term performance remains strong.
The above graph illustrates this in real terms: if we invested $50,000 in bank bills ten years ago we would now have around $82,000 compared with over $111,000 in the CSS – a difference of $29,000.
HOW ARE CSS MEMBERS 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.
The Board has a reserve 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 over the next few years.
TO SEE HOW A ZERO CREDITING RATE AFFECTS YOUR BENEFIT, OR IF YOU ARE INTERESTED IN MORE INFORMATION ON THIS YEAR’S RESULTS, GO TO MY ONLINE REPORT TO MEMBERS IN JULY
INVESTMENT REVIEW UPDATE
As reported in July, every three years the Board undertakes a major review of its investment strategy and one such review has just been concluded. In conducting this triennial review, the Board has worked very closely with its strategic investment advisor, Total Risk Management.
The review showed it is unlikely that, going forward, financial markets will be any less volatile than they have been in the past. In order that it can continue to minimise short-term risks whilst maximising long-term returns, the Board has lowered the average real return objective of 5% per annum after tax and fees to 4.5% per annum after tax and fees. If the old objective of a 5% real return were pursued then it is likely that the CSS would deliver a negative return more frequently than one year in five and this was considered unacceptable by the Board.
The review has also resulted in a reallocation of assets (see
table below).
| Asset | Previous
Allocation % |
New Allocation
% |
|---|---|---|
| Australian Equities | 30 |
30 |
| International Equities | 47 |
25 |
| Property | 10 |
10 |
| Absolute-Return (Hedge) Funds | - |
5 |
| High Yield Debt | 3 |
- |
| Australian Fixed Interest | 8 |
13 |
| International Fixed Interest | - |
15 |
| Cash | 2 |
2 |
| TOTAL | 100% |
100% |
The changes in asset allocations reflects changes we expect in the investment market, most particularly that investment returns from assets such as international equities may be lower than we have seen over much of the last decade.
To deliver the best long-term results and safeguard the interest of members in this volatile environment, the Board has decided that it would be prudent to:
-
reduce the Fund’s investment in international equities (from 47% to 25%), although this asset class has performed exceptionally well in the past;
-
increase investment in Australian fixed interest (from 8% to 13%); and
-
introduce investment in international fixed interest (15%) and absolute return strategies, or so-called ‘hedge’ funds (5%) – the latter are biased towards market-neutral funds and not speculative or heavily-leveraged.
The changes to international equities and international fixed interest allocations occurred in early July 2002, and the other asset reallocations will occur over time.
As always, the overall asset allocation is a policy position and, in response to market fluctuations, may vary slightly from time to time.
For more information about investments in general, go to our INVESTMENT INFO or contact my office via email on secretary@aria.gov.au
IF YOU ARE PLANNING TO RETIRE OR CLAIM YOUR DEFERRED BENEFIT IN
THE NEXT 12 MONTHS
We understand that if your retirement is imminent, your outlook is more short-term. If you are planning on retiring or claiming your deferred benefit 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 and use the i-Estimator. Remember you will need your Access Number to use the i-Estimator. If you do not have an Access Number, simply download an Access Number application form.
