Investment option changes and operational risk reserve
This letter is to tell you about changes to investment options. It also contains details about new Government reforms that require trustees to establish and maintain an operational risk reserve.
Investment option changes
Commonwealth Superannuation Corporation (CSC), the trustee of the Commonwealth Superannuation Scheme (CSS), has recently made changes to the investment return objective and target asset allocation for the Default option of the CSS.
The changes have no impact on the determination of your CSS benefit.
The new investment objective for the Default option is set out below:
|Investment Return Objective||Investment Horizon|
|CPI + 3.5%||10 years|
The investment objective for the Default option has changed because CSC expects that, for the same level of risk taking, average investment returns in the decade ahead will be lower than those generated in the stronger growth environment of the 1980s -2000s. This reflects the ongoing impact of the global financial crisis. As developed economies reduce their debt, growth in economic activity and in corporate earnings is likely to be lower, on average, than in the decades preceding the crisis.
For the Default option, the tolerance for risk is defined as a 20% probability of loss. This is broadly equivalent to an expectation that the Default option is likely to generate at least one year of negative returns in every five years. CSC expects that, to maintain this tolerance for risk, real returns for the Default option (in other words, returns above inflation) are likely to average around 3.5% per annum over the next decade. Importantly though, in any one year, real returns may vary materially.
Target asset allocation for the Default option has also changed. The new asset allocation and further information about the impact of investment returns on your benefit is available in the CSS Product Disclosure Statement (PDS) and the Investment Options and Risk booklet. Both documents are available from the CSS website.
Operational Risk Reserve
The Government’s Stronger Super reforms require trustees of all super funds to establish and maintain an operational risk reserve from 1 July 2013. The purpose of a risk reserve is to provide a source of financial resources to protect members’ interests should an operational failure occur that results in losses to the fund or to members. An operational failure may occur due to inadequate or failed internal processes, people and systems or from external events. Use of an inaccurate unit price to process a transaction is an example of an operational failure that could lead to a Scheme or member loss, which may be addressed through the use of the operational reserve.
CSC has set a target funding level for the risk reserve of $17M (which represents approximately 0.40% of funds held within CSS).
CSC will build up the risk reserve over time to minimise the impact on current members. Based on the current funds held within CSS, from 1 July 2013 an amount of 0.14% p.a. will be accrued from the earnings rate of the CSS investment options. This will result in a minor impact on the unit prices and investment earnings of investment options. It is expected that the target funding level will be met after three years, but this could change if an operational failure occurs within that period which requires use of the reserve. CSC will provide an update if there are material changes to the operation of the risk reserve. CSC will be monitoring the build up of the operational risk reserve quarterly to ensure that it remains on track.