australia post super scheme - apss

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InsightAUSTRALIA POST SUPER SCHEME

Australia Post Superannuation Scheme ABN 42 045 077 895

News from the Australia Post Superannuation Scheme Quarter ending September 2019

• Sailing into the wind: Navigating a challenging investment outlook

• What the outlook means for your APSS Defined Benefit

• Investment update for the quarter ending 30 September 2019

Financial markets are facing into headwinds, which may mean lower investment returns over the next five to ten years, compared with the returns achieved in the last decade.

Navigating a course into and through these headwinds is a top-of-mind priority for our investment managers right now, but what can you do about them as a super fund member?

In this edition of Insight, we consider the conditions that have given rise to these conditions and what to think about to provision for your future.

Sailing into the wind

Navigating a challenging

investment outlook


Australia Post Superannuation Scheme – Quarter ending September 2019

Insight

The world economic outlook suggests we need to prepare for lower investment returns over the next decade.We all know that it takes longer to reach a destination when you’re heading into the wind than when you’ve got it behind you. The same applies to investors when facing conditions that make investment growth harder to achieve. With patience, preparation and realistic expectations, investors can still reach their financial destination, despite the ‘headwinds’ that are forecast in the years ahead.

Why are returns expected to be lower? Let’s face it, financial markets are unpredictable and investing is rarely ever simple. Investment markets are regularly buffeted by financial squalls that often pass quickly but can sometimes turn into damaging storms, driving us off course. At other times, it’s smooth sailing, as we enjoy the journey to our financial destination.But there are some things about today’s investment environment that, we think, mean investment returns will generally be lower over the next decade compared to the last. To explain why, we need to go back 10 years to the conditions created by the global financial crisis (GFC) of 2008.Since the GFC, we have seen central banks around the world keep cash interest rates low in an effort to stimulate economic activity and repair damaged balance sheets.

In Australia, we avoided the economic trauma suffered by other economies in the GFC but, responding to global and domestic conditions, the Reserve Bank of Australia has lowered the official rate from 7.25% per annum in mid-2008 to 0.75% today. The success of these monetary policies is still being debated. For example, the US has had one of its longest ever periods of economic expansion, yet the pace of economic growth has been sluggish and average wage growth has been subdued. What is clearer is that low interest rates have been a major tailwind for asset prices over the last ten years. More money in the system, lower borrowing costs and the search for better returns than cash interest rates have lifted demand for assets such as bonds, shares, property and infrastructure, driving up their value. This has been great for superannuation investors, with returns on average comfortably exceeding their published objectives.That brings us to the present, where asset values are generally high and the global economy is showing signs of slowing down. With interest rates already so low, central banks are running out of options to maintain the investment returns of the last decade. These conditions are what cause us to expect more investment headwinds for the next several years.We can’t predict the future investment journey precisely and don’t believe anyone can.

Important Australia Post Superannuation Scheme (ABN 42 045 077 895) Issuer: PostSuper Pty Ltd (ABN 85 064 225 841) RSE Licence Number L0002714. APSS Registration Number R1056549. The information contained above is of a general nature, is not intended to be financial product advice and does not take your personal financial circumstances into account. Before acting on any information on this site you should first consider its appropriateness to your financial circumstances. If you have any doubts or require further assistance you may wish to seek the advice of a licensed financial adviser. The APSS Trustee does not hold an Australian Financial Services Licence and therefore is not licensed to provide you with financial product advice.


There may be a sudden financial-market storm causing significant losses, followed by more favourable conditions leading to a market recovery. Or we may find ourselves having to keep adjusting our course, making slower progress but still going forward. Either way, we expect that building super savings over the next decade will be slower and harder than it was in the last decade.

What can be done about this? Firstly, there’s nothing the majority of our employee members need to do in respect of their Defined Benefits because these are totally protected from investment risks. Australia Post and affiliated employers bear all the investment risk, not members. There may, however, be some impact if you are among the relative minority of members with an ‘Other Offset Account’ linked to your Defined Benefit, as explained on page 5.

Secondly, if you have an APSS Member Savings or Pension account, there are some tried and tested investment rules to get you to your financial destination and these haven’t really changed:• Map your course – choose an investment strategy

that matches your long-term objectives and your investment timeframe.

• Build a sturdy boat – diversify or spread your investment options to reduce the risk of losing out on a single asset or market.

• Strengthen your sea legs – try to avoid reacting emotionally to short-term investment returns.

To help APSS members to map their investment voyage, we have four straightforward Member Savings investment options – Cash, Conservative, Balanced and High Growth. For each investment option except Cash,


Insight

Important Australia Post Superannuation Scheme (ABN 42 045 077 895) Issuer: PostSuper Pty Ltd (ABN 85 064 225 841) RSE Licence Number L0002714. APSS Registration Number R1056549. The information contained above is of a general nature, is not intended to be financial product advice and does not take your personal financial circumstances into account. Before acting on any information on this site you should first consider its appropriateness to your financial circumstances. If you have any doubts or require further assistance you may wish to seek the advice of a licensed financial adviser. The APSS Trustee does not hold an Australian Financial Services Licence and therefore is not licensed to provide you with financial product advice.



Insight

we have a guide about what return above inflation to expect on average, what sort of timeframe applies and how often you should anticipate that your investment could fall in value, as a measure of risk. See your relevant Product Disclosure Statement (PDS), which can be downloaded at apss.com.au under the Publications & Forms tab, for details.The Cash option is a bit like staying in the harbour! It is designed to keep the value of your savings absolutely safe but, in today’s low-interest rate environment, cash offers very little in the form of returns.Diversification is already built into the Conservative, Balanced and High Growth investment strategies, which are invested in different proportions across a wide array of asset classes. Each asset class, for example shares, is also widely diversified across the Australian and international markets. The APSS retains specialist investment managers to help us navigate through changing market conditions. These factors don’t make any option immune from the low-return conditions that we expect but they alleviate the impact if any single investment suffers a heavy loss.Keep in mind though, that the forces causing us to expect low interest rates to continue for longer are also expected to keep inflation low. That means, for example, a modest 4% or 5% annual return would still comfortably exceed today’s 1% to 2% annual inflation level, assuming it persists.

What does this mean for you? Our long-term market outlook does not, in any way, constitute a recommendation about your Member Savings investment option choice(s), or any other personal investments. Remember, market movements are impossible to predict and the market outlook we’ve described could play out in all sorts of different ways. The key message is that you may need to adjust your personal expectations if, as our outlook indicates, lower returns are delivered over the coming years compared to those we have enjoyed in the past few years.

Of course, if you haven’t already done so, consider whether you are in the right investment choice for your age and situation. Our highly-trained service representatives, who can be reached on 1300 360 373, can explain, in general terms, what choices are appropriate for different members at different ages. They cannot, however, provide you with personal personal financial advice. For that, you need to speak to someone licensed to provide such advice. Remember, you can access personal financial advice through StatePlus by calling 1800 620 305.* Other questions you might like to consider include: 1. Should I contribute extra to super, so that I don’t rely

on high investment returns to live well in retirement?2. How many more years do I need to work in order to

build up enough to retire on, if investment returnsaren’t going to supercharge the benefits and savingsI have accumulated so far?

3. How much will I need in retirement – start aspending budget to work out how long your superwill last you once you stop working.

Exploring such questions will get you started in navigating your own successful retirement journey. *If you decide that you need some personalised, individual advice about your super, beyond the general help youcan get by calling the APSS contact centre (as our service representatives are not licensed to provide personalised financial advice), you can choose any financial planneryou want. You may wish to consider State Super Financial Services Australia Limited (StatePlus) (ABN 86 003 742 756, AFS Licence No. 238430). StatePlus is a licensed financial planning group that the APSS Trustee has a relationship with. As an APSS member, you are entitled to an hour of financial advice provided by StatePlus that will be free of charge and at no obligation to you. You can talk to a StatePlus financial planner over the phone, or arrange a face-to-face appointment at a location convenient to you. To access these financial planning services, provided by StatePlus, call 1800 620 305. Please note that neither the APSS Trustee nor the Australian Postal Corporation endorses, recommends or guarantees any services provided by StatePlus. StatePlus is responsible for the advice given to APSS members under this arrangement.

What the outlook means for your Defined Benefit


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You will have an Other Offset Account if part of your APSS Defined Benefit has been paid to you on compassionate grounds or due to severe financial hardship, or if you use some of your APSS Defined Benefit to commence an APSS Pension while still in employment.Check your recent APSS annual benefit statement, to see if you have such an account. If you don’t, then this is not relevant to you – take comfort in knowing that your APSS Defined Benefit is protected from whatever happens in the financial markets. If you do have an Other Offset Account, it means that you have accessed money from your Defined Benefit early, before it would otherwise be payable to you. The details will be noted in the ‘Offset

accounts’ section of your annual benefit statement. Having accessed your Defined Benefit in this way is effectively like taking a loan from it – a loan that needs to be paid back (with interest) by being deducted (i.e. offset) from your Defined Benefit when that Defined Benefit ultimately becomes payable to you. The applicable interest rate is the investment return (i.e. crediting rate) earned on the assets held in the APSS to pay Defined Benefits, which will reflect what happens out there in financial markets. So, to this extent, the forecast headwinds will have some effect on your benefit. Call us on 1300 360 373 if you’re unsure about how your Other Offset Account works.

Defined benefits are based on a formula that takes into account your period of employment and your Final Average Salary, not on investment performance. That means, if you have an APSS Defined Benefit, it will generally be unaffected by the investment challenges described in the previous article. If, however, you happen to have an APSS ‘Other Offset Account’, then you need to consider the following.

Investment round up

Crediting rates to 30 September 2019

Each APSS investment option has its own underlying investment portfolio. Each option’s crediting rate is determined by the investment return of its portfolio less the costs associated with investing those assets. With the exception of the Cash option, which is always invested in cash (and cash equivalents), each option has a mix of assets, just in different proportions. A portfolio with a higher allocation to shares and other ‘growth’ assets (e.g. the High Growth option’s portfolio), is expected to deliver higher investment returns and therefore higher crediting rates over longer timeframes. However, the higher the allocation to growth assets, the more volatile the portfolio is considered to be. The more volatile, the higher the risk of the portfolio dropping in value in the short term.

Member Savings accounts (including Spouse and Rollover accounts)

$

Cash Conserva�ve Balanced High Growth

3 months 0.27% 1.34% 1.85% 1.71%9 months 1.12% 6.55% 9.77% 11.78%1 year 1.53% 5.62% 6.98% 6.71%3 years (p.a) 1.55%

n/a7.39%

n/a5 years (p.a) 1.65% 7.50%Transition to Retirement (TTR)* Pensions 3 months 0.27% 1.34% 1.85% 1.71%9 months 1.12% 6.55% 9.77% 11.78%1 year 1.53% 5.62% 6.98% 6.71%3 years (p.a) 1.62%

n/a7.68%

n/a5 years (p.a) 1.82% 8.11%APSS Pensions (Tax free)*3 months 0.32% 1.54% 2.10% 1.90%9 months 1.33% 7.58% 11.03% 13.57%1 year 1.82% 6.48% 7.80% 7.72%3 years (p.a) 1.82%

n/a8.50%

n/a5 years (p.a) 1.94% 8.60%

Note: The compound crediting rates shown above are after investment costs and tax (where applicable). Before 1 July 2017, the Cash option was called ‘Cash Return’, and the Balanced option was called ‘Market Return’. The Conservative and High Growth options commenced on 1 July 2017, which is why returns for periods longer than 1 year are currently not applicable (n/a).*APSS Pension investment earnings are tax-free, unless you are using an APSS Pension to transition to retirement, in which case earningsmay be taxed at up to 15% if you have not turned 65 or met a relevant condition of release and notified the APSS. Use the TTR Pensionstable above for the applicable crediting rates where tax applies to an APSS Pension.

Important reminder: Past investment returns are not necessarily indicative of future investment returns.


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Defined Benefit portfolio As described on page 5, the Defined Benefit portfolio’s investment return (i.e. crediting rate) has no financial impact on the APSS Defined Benefit for most members. This is because that entitlement is determined by a formula, rather than the investment returns of the portfolio. The only exception is where a member has an ‘Other Offset Account’, which won’t apply to most members. If it does, you’ll see it on your annual benefit statement.

Investment round up

25%

34%

5%

8% 11%

17%

60%

5%

16%

19%25%

40%

8%

4%4%

40%19%

5%

17%

8%

11%

8%

11%

100%

Cash Conserva�ve

Balanced Defined Benefit

DB

High Growth

$

Public market shares

Private equity

Real assets

Alterna�ve credit

Bonds

Cash

Asset allocations at 30 September 2019Asset allocation is the mix of different asset classes (and assets within each class) in an investment portfolio. Strategic Asset Allocation (SAA) refers to the strategy used to achieve a particular investment objective. Actual asset allocation is a snapshot of the mix of assets at a particular point in time. This might vary from the SAA, but only within allowable ranges that are set as part of the overall investment strategy. The following charts show the actual asset allocations as at 30 September 2019 for the four APSS investment options, along with the assets invested to provide benefits to members entitled to an APSS Defined Benefit as required:


Insight

Investment round up

Australia Post Superannuation Scheme (ABN 42 045 077 895) Issuer: PostSuper Pty Ltd (ABN 85 064 225 841) RSE Licence Number L0002714 APSS Registration Number R1056549. Important Note: All investments carry risk and may rise and fall. International investing involves additional risks, including the risk of currency fluctuations. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is not a guarantee of future returns or crediting rates. APSS’s crediting rates are calculated fortnightly and are published on apss.com.au under the Investments tab. The information contained in this publication is of a general nature, is not intended to be financial product advice and does not take your personal financial circumstances into account. Before acting on any information contained in this document you should first consider its appropriateness to your financial circumstances. If you have any doubts or require further assistance you may wish to seek the advice of a professional financial adviser. The APSS Trustee does not hold an Australian Financial Services Licence and therefore is not licensed to provide you with financial product advice. The APSS Trustee has a relationship with State Super Financial Services Australia Limited, trading as ‘StatePlus’, a licensed provider of financial planning services (ABN 86 003 742 756, AFS Licence No. 238430). StatePlus is responsible for the advice given to APSS members under this arrangement. Issued: October 2019.

Ongoing US-China trade tensions created volatile share market conditions last quarter, while boosting demand for government bonds and ‘safe’ currencies. In the end, it was a positive quarter for returns across all asset classes and APSS investment options.

World MarketsThe new financial year started positively in share markets but volatility returned in August, when the US announced additional tariffs on Chinese imports and China swiftly retaliated with curbs on US agricultural products. The US Federal Reserve cut its target cash interest rate twice during the quarter, reducing it to 2.0% per annum. Also aiming to counteract the economic slowdown, the European Central Bank and Chinese authorities introduced new monetary stimulus during the quarter. Ultimately, share markets across developed economies overseas recorded a reasonable 1.5% gain* for the quarter. Asian and developing country share markets were weaker, reflecting their exposure to trade tensions.International government bonds performed well out of the rising level of risk aversion in financial markets, gaining over 2% in aggregate.* As their values rose, the yields on government bonds, meaning the effective rate of interest they offer in proportion to their market value, reached extreme lows. In some countries, most notably Germany and Japan, government bond yields became further entrenched below zero.

Australian MarketThe Reserve Bank of Australia (RBA) cut the cash interest rate from 1.25% to 1% in August, after deciding that more needed to be done to reduce unemployment and nudge up the domestic inflation rate, which has recently tracked below the RBA’s 2% per annum lower target. If inflation falls too low, the argument goes, consumers and businesses may start to defer their spending, creating weakness in the economy. The RBA subsequently cut the interest rate to 0.75% at the start of October.With our cash rate moving well below the US’s, the Australian dollar fell by over 3% in value against the US dollar, down to 67 US cents at 30 September. It also fell against the Japanese Yen, but held its value against the Euro. Australia’s share market performed well for the second quarter in a row, returning 2.6%, with banks and energy companies delivering particularly good gains.

Impact on APSS investmentsThe APSS’s public market share investments gained 1.0% for the quarter, in line with the overall movement in global share markets. Our private equity investments had a strong quarter, recording a 4.1% return that included an element of currency gains, due to the weakening Australian dollar. The real assets investments that were added into the APSS asset mix in early 2019 performed even better with a 5.2% return. Our alternative credit investments earned 2.3%, while bonds earned 1.7% and cash 0.3%. All of these figures are quoted before-tax.

* Market return figures are sourced from Willis Towers Watson

Behind the numbers


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