Pensions Delivery Case Study

1. Pensions Delivery Case Study Tony Lally CEO, Sunsuper 30 October 2007 Rotman / ICPM / NetsparMaastricht University Discussion Forum

2. Superannuation in Australia • A$1,150bn in assets • Four major segments • Industry funds • Retail funds/Mastertrusts • Self-managed funds (<5 members) • Corporate funds • Corporate funds moving to mastertrusts/industry funds (down from 555 in June 2006 to 290 in June 2007) 1. APRA Statistics Quarterly Superannuation Performance June 2007.

3. Robust growth outlook for superannuation Source: Trowbridge Deloitte Super 2015 model (AMP Capital presentation March 2007)

4. Government Age Pensions in Australia • No social security contributions • Age pensions are means tested • Assets test • Income test Based on Single Person, Homeowner (@ 20 Sept 2007) • Additional benefits with Age Pension • Concession Card • Rental Assistance and Pharmaceutical Allowance • Complicates retirement planning • Significant focus for financial planners

5. Sunsuperbackground • Established 1/10/1987 • Sponsors – Commerce Queensland, Queensland Council of Unions/AWU • Employers - 60,000+ • Members – 1,000,000 (3rd largest) • Funds at 30/6/2007 - A$12.7bn • Six Directors, three nominated by CQ, three nominated by QCU/AWU • 85 staff • Administration outsourced, 350 staff • Investment management outsourced, Sunsuper team of 7 under CIO • Compulsory employer contributions of 9% of salary • Voluntary member contributions • Major focus to date on benefit accumulation pre-retirement • At 30/6/2007 only A$150m in post-retirement product(1.2% of fund)

6. Sunsuper - 25% of members hold 85% of funds

7. Sunsuper - members are under 40; funds are over 40

8. Pension regulations in Australia – pre 1/7/2007 • Benefits preserved to age 55 (60 if born after June 1964) • Taxation

9. Pension market in Australia – pre 1/7/2007 • All investment earnings tax-free once pension payment commences • Most fund members take lump sums on retirement • Mainly private retail pensions sold by financial planners • Products • Lifetime annuities • Term annuities • Allocated pensions • Some products have concessions for Age Pension means test (eg lifetime annuities) • Financial planning priorities • Age Pension qualification • Tax • Investments

10. Pension regulations in Australia -1/7/2007 changes • Assets can remain in super fund indefinitely • Members can contribute at same time as drawing down benefits after age 55 • Transition to retirement • No limit on benefits payable • Taxation Pre 1/7/07 1/7/07changes

11. Implications of 1/7/2007 changes • Members will leave assets in super funds post-retirement • Rapid growth in post-retirement market • Older Australians will transfer non-super assets into super • Many people will transfer assets into super approaching retirement • New pension products required • Initial focus on transition to retirement products (salary sacrifice/pension drawdown) • Longer term solutions under development • Some gimmicks launched (eg linking ATM to pension accounts) • Sunsuper developing a complete retirement income solution Source: Rice Warner Actuaries, IFSA Presentation, 2 August 2007

12. Three distinct phases of retirement Source: Rice Warner Actuaries, IFSA Presentation, 2 August 2007

13. Pension provision needs to reflect lifestyle needs • Highest expenditure in Active Phase • Capital needs (upgrade white goods, house, car) • Holidays (trip of a lifetime) • Reduction in needs as lifestyle becomes more frugal in Passive Phase • More conservative (no scope to recover from losses) • Local holidays, retain car longer • “Discount” lifestyle • Many retirees run out of superannuation and fall back on Age Pension • Expenditure in Frail Phase grows • Health costs peak, although there are significant government subsidies for health expenditure in these years • Decision-making ability is diminished • Aged care and accommodation needs change • Sale of home to fund nursing home care in old age

14. Segmented approach required • Retirement can occur at any age • Solutions need to consider key trigger retirement ages (55, 60, 65) • Retirement at other ages need intermediate solutions • Segment members at retirement by balances • Draw down lump sum over 0 – 10 years (0-$50,000) • Income to supplement Age Pension ($50,000-$166,750) (Single homeowner) • Income integrated with Age Pension ($166,750 - $529,250) (Single homeowner) • Independent income ($529,250+) (Single homeowner) • Assumptions • Lower balances mean lump sums over a short period post retirement – no income • No Age Pension before age 65 • Transition to retirement strategy required • Where members do not fit assumptions - advice/more information will be required

15. Longevity • There are three inter-relationships • How much is available for investment? • How long is it paid for? • What is the income level? • Two of these are known, the third can be calculated • Pensions have historically focussed on maintaining purchasing power which ignores • Integration with Age Pension • Age Pension increases in line with inflation • Income needs deteriorate as people age • Age Pension is the safety net for those with lower balances • A new approach is needed

16. Longevity options for members with age pensions Option A (level total income) Option B (level fund income) Option C (flying start) Option D (preserve capital) Initial balance $310,000

17. Longevity options for members without age pensions Option A (level total income) Option B (inflation-linked) Option C (flying start) Option D (preserve capital) Initial balance $1,000,000

18. Sunsuper retirement income solutions • Strategy • Build on the trust based on many years membership • Provide options which are simple • Pro-active member management • Minimise requirement for advice Step 1 Information for decision on pension Fallback Telephone advice Fallback Face to face advice • Pre-retirement member engagement • Assemble required member data (retirement date, retirement income needs, assets etc.) • Transfer all super assets to Sunsuper • Provide appropriate retirement planning tools (tailored statements, written and web based tools – eg video, calculators) • Pre-dispose members to retire with Sunsuper • Free advice/information support provided by phone via Member Advice Centre (MAC) • Face to face advice available from Sunsuper financial planners (fee for service)

19. Sunsuper retirement income solutions (cont’d) • Transition to retirement • Salary sacrifice and drawdown pension concurrently • Two accounts needed, contribution account is taxed at 15% on earnings, pension account is tax-free • More complex and requires higher level of advice

20. Sunsuper retirement income solutions (cont’d) • At retirement • Segmented approach based on eligibility for Age Pension • Provide limited choices • Income level or expiry age for pension chosen by member • Best endeavours • Not indexed • Access to capital if required, reset income or expiry age • Target for self-select vs advice

21. Sunsuper retirement income solutions (cont’d) • Payment options • Directly to bank account • Monthly • Tax-free • Investment options • Default option based on “real” fund holding assets with high income and lower asset value volatility eg. • Infrastructure • Property • Utilities • High-yielding shares • Corporate bonds • Limited other options, one lower risk and one higher risk

22. Sunsuper retirement income solutions (cont’d) • Post-retirement • Annual statement, reset income level or expiry age • Provide option to amend original selection • Report on investments • MAC/financial planners available for discussion/advice

23. Summary • Traditional pension provision will not meet retirees needs • Guarantees are too expensive • Retirees want flexibility to reflect changing lifestyles as age advances • Income needs reduce with advancing age • Aged care is a special need requiring other considerations outside super (eg sale of home) • Best endeavours can best meet retirees needs when matched with • simple but adequate communication/advice • appropriate investment processes • Age Pension as safety net

24. Thank you This presentation contains general advice and does not take into account the investment objectives, financial situation or needs of any particular individual. Because of this you should consider the appropriateness of the advice, having regard to your own particular objectives, financial situation and needs before acting on any advice. You need to apply the concepts to your own situation before making an investment decision.  You should obtain and consider a copy of the Product Disclosure Statement (PDS) before making a decision to acquire, or continue to hold the product. You can obtain a PDS by contacting the Customer Service Hotline on 13 11 84 or by visiting www.sunsuper.com.au. Before making a decision to switch between superannuation funds you should consider whether there is any impact from exit fees, withdrawal fees or loss of other benefits. This publication has been prepared and issued by Sunsuper Pty Ltd (ABN 88 010 720 840) (AFSL No.228975) (RSE Licence No. L0000291) which is the Trustee of the Sunsuper Superannuation fund (ABN 98 503 137 921) (SPIN SSR 0100 AU) (RSE Registration No. R1000337). While it has been prepared with all reasonable care, no responsibility or liability is accepted for any errors or omissions or misstatement however caused. All forecasts and estimates are based on certain assumptions which may change. If those assumptions change, our forecasts and estimates may also change. Contributions to superannuation are subject to the preservation rules. Sunsuper Financial Services Pty Ltd (ABN 50 087 154 818) (AFSL No. 227867) is a wholly owned subsidiary of Sunsuper Pty Ltd.