The Strategic Evolution of the Superannuation Industry October 2015

Institutional investors differ and most super funds are evolving strategically Competition, market and pricing pressures, regulation, technology and retailisation are pushing superannuation funds particularly along this strategic spectrum Full Service Retirement Product and Asset Managers Focused and Singular Investment Trusts Multi Product Superannuation Funds Retail Superannuation Focused Mutuals Complex Retirement Savings and Income Funds Diverse Financial Services Businesses Where to position on the spectrum is a key strategic decision for each fund 2

Full Service Retirement Products and Asset Manager Simple and Singular Investment Trust Multi Product Superannuation Fund Retail Superannuation Focused Mutual Complex Retirement Savings and Income Fund Diverse Financial Services Business (FSB) Key issues in this strategic evolution Low Governance Complexity (incl. Delegations) High Low Operational /Technology Scope and MarketingHigh Low Platform Complexity and Product Diversity High Low Internal Investment Expertise and Management High Low Competition and RetailisationHigh HighOutsourcing Low 3

Key Drivers of The Strategic Transition

Regulation Policy and Legislation Competitive and Market Dynamics Product Diversity The Member Interface Efficiency and Costs MySuper Price/cost strategy 5 Stronger Super, reporting APRA Prudential Standards Future of default fund status Proposed changes to independence on Boards Further SGC increases? Potential for review of concessional tax status? The rise of SMSFs Competitive advantage and differentiators Transition from retirement savings to retirement incomes Addressing market/member segments Critical mass and cost of diversity Default fund and customisation Communications, use of technology Brand and retention Distribution Change driver 1: market and legislative drivers

Net cash flows as a % of a fund are falling… Change driver 2: the liability side of funds … and fund membership is ageing The nature and characteristics of the typical superannuation fund’s membership is evolving and the behaviour of the membership is also changing: ⁻Cash flow as a percentage of fund assets will decline over time, despite increasing Super Guarantee contribution rates; ⁻Despite new, mostly young employees entering the workforce, fund memberships are ageing and older members hold a larger proportion of invested funds; and ⁻Switching between investment options within a fund continues to increase 6

Investment DimensionOptions and Ideas Portfolio management approachesScale, in-sourcing, internal management, increased control Tax, risk and liquidity managementIn-house specialists, benchmarks and bespoke mandates, systems and management Strategic and dynamic asset allocationDifferentiation, illiquids allocation, DAA scope and frequency, sector and sub-sector tilts Sector configuration and manager selection Tilts, smart beta, concentration Fees, costs and implementationFee structures, insourcing, active/passive, competitor issues Change driver 3: the search for new investment ideas 7

Investment Governance Risk Manage the risk of investment losses preventable by the trustee through better: ‒strategy ‒due diligence and contracting ‒monitoring of investments and investment managers ‒Internal resourcing Agora & Trio Capital Think about the investment over its life course

Relevant law SIS Covenants, in particular: ‒Care, skill and diligence ‒Investment covenants: formulate, review regularly and give effect to an investment strategy for the whole of the entity, and for each investment option having regard to:... ‒Risk having regard to trustee objectives and cash flow requirements ‒Risk of inadequate diversification ‒Liquidity and expected cash flow requirements ‒Reliability of valuations ‒Fund liabilities ‒Tax ‒Costs ‒Other relevant matters Due diligence in developing, offering and reviewing regularly each investment option Allow each beneficiary adequate diversification

Relevant Law (cont.) Other SIS provisions – e.g. in-house assets; arms length; liens; financial assistance to members, MySuper - best financial interests SPS 530 Investment Governance: ‒investment objectives for each investment option ‒due diligence process for selection ‒monitoring performance ‒review of objectives and strategies ‒Liquidity SPS 231 Outsourcing SPS 220 Risk Management And be mindful of: SPG 530 Investment Governance SPG 531 Valuations

Consequences of The Strategic Transition

Investment governance framework Are you ready? Funds preparing for this transition need to plan, create and embrace it. Never before has an investment governance framework been so important. Why? Governance is the framework connecting decision makers around a specific area. Investment governance is the process for overseeing and making decisions around investments. It is vital to achieving positive outcomes, including investment goals. It implies a fiduciary responsibility in the context that we most commonly use it. 9

Investment governance and achievement of an investor’s goals Investment Beliefs and Philosophy What do I believe? How will I make money and manage risk? Investment Objectives What do I need to achieve? What are my goals? Investment Strategy What should my portfolio look like to achieve my objectives? Implementation What should I invest in? What should I avoid? Monitoring How am I going relative to my objectives? Do I need to change anything? Governance Checklist Process to establish investment beliefs Broad agreement amongst stakeholders Living policy documents Governance Checklist Regulatory requirements Awareness of all stakeholders Documentation of appropriate processes to establish objectives Governance Checklist Investment decision making Risk assessment and systems Stress testing and scenario analysis Delegations protocols Governance Checklist Delegations protocols Resource allocations Assurance reviews Insourcing versus outsourcing Governance Checklist Feedback loops about investment beliefs Quality of reporting Performance attribution 9 10

SPS 530 Investment Governance Superannuation Prudential Standard SPS 530 Investment Governance – creates the obligation to have an Investment Governance Framework in place for the selection, management and monitoring of investments. It must: Be appropriate to the size, business mix and complexity of its business operations; and Include the investment strategies for the whole RSE as well as each investment option The RSE licensee is ultimately responsible for the Framework and must ensure it is independently reviewed at least every three years. The Investment Governance Toolkit is designed to assist Trustees with understanding and implementing SPS 530 Investment Governance. The toolkit contains functional tools such as diagrams, decision trees, flowcharts and checklists to assist Trustees with understanding and applying their legal obligation and regulatory guidance. 11

Investment Governance Toolkit The Toolkit: combines SPS 530, SPG 530 and more! provides guidance for trustees on: ‒investment governance framework ‒investment strategy ‒investment objectives ‒portfolio construction ‒investment risk management ‒stress testing ‒liquidity management Does not address ESG factors, modelling asset allocation and rebalancing, conflicts or managing the transition of investments

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