Chairman's Overview
On behalf of the Board I am pleased to present this report on the operations of the Military Superannuation and Benefits Board of Trustees for the financial year to 30 June 2009.
Global Financial Crisis
From an investment perspective 2008–09 was a tough year as superannuation funds and investors across the world grappled with the continuing fall-out from the Global Financial Crisis (GFC). After years of above average returns, by the end of 2007 investors could have been forgiven for believing that investment markets and underlying asset values only move in a positive direction. However, that is not the case.
The GFC which took hold in late 2007 resulted from systemic problems in the financial markets, the collapse of the US housing sector and related sub-prime mortgages and excessive borrowings. The increasing complexity of financial instruments and poor risk management led to huge losses by lenders and to bank failures. Bear Sterns, regarded as a Wall Street stalwart was the first to fail and the subsequent failure of the 158 year old Lehman Brothers led to the near collapse of the global financial system.
The GFC has since come to be described as the most serious financial crisis since the massive stock market crash of 1929 which ushered in the Great Depression that lasted for more than a decade. Indeed there are similarities between the 1929 crash and more recent events, with current global effects characterised by the failure of key businesses, declines in consumer wealth, substantial financial commitments incurred by governments and a significant decline in economic activity.
The response from the US Federal Reserve and central banks around the world has been dramatic as they have taken steps to expand money supplies to the financial markets. Governments have enacted large scale fiscal stimulus packages to offset the reduction in liquidity and demand in the private sector.
In this environment, from its peak in November 2007 until March 2009 the Australian share market fell by almost 55%. This was similar to the experience of public markets around the world.
History tells us that investment markets move in cycles and that despite short term volatility, in the long term markets recover and ultimately exceed their previous high points. Therefore the Board remains committed to buying and holding quality assets for the longer term and across economic boom and bust cycles.
MilitarySuper’s Investment Performance
MilitarySuper‘s investments have been adversely affected by the GFC as reflected in the Fund’s performance to 30 June 2009. The Fund ended the financial year with net assets of $2.81 billion, a decline of $124 million from the prior year end.
The vast majority of Members are invested in MilitarySuper’s Growth Option which is the Fund’s default option. It returned -13.0 percent net of fees, charges and taxes. This compared to the average growth option net return of -15.6% percent for Australian superannuation funds as reported by the independent ratings agency SuperRatings for the financial year to 30 June 2009.
Despite the difficult investment environment, for the financial year to 30 June 2009 SuperRatings assessed MilitarySuper’s performance in all investment options with the exception of the Conservative Option, as being amongst the top performing funds for the year. Further details of MilitarySuper’s comparative performance in each of the five investment options against returns for comparable funds across 1, 3 and 5 year periods are provided later in this report.
Despite the negative short-term impact of such results on the Fund, the current investment environment is providing considerable opportunities for patient, long-term, capital investors such as MilitarySuper to identify and take advantage of quality assets at affordable prices that have the potential to deliver strong returns to the Fund in years to come.
The Year Ahead
The Board recognises that the road to full economic recovery will probably be slow and that there may be setbacks along the way. Volatility and risk in financial markets and growth in the short to medium term will remain challenges for most western economies. To some extent we are in unchartered waters involving untested stimulus measures and other government and central bank actions designed to restore economic activity. In these circumstances the Board believes that we can expect lower average investment returns and increased variability of returns in future.
Our focus on managing risk and exercising caution in deploying cash back into investment markets, especially during the recovery phase of the financial crisis, should shield Members from some of this expected volatility. Like many other superannuation funds the Board and Management of MilitarySuper will be looking to learn from the GFC in reviewing and setting future investment strategies.
Merger of the Boards of the Major Commonwealth Superannuation Schemes
In October last year the Government announced that it intends to merge the boards of the MilitarySuper and the DFRDB Authority with the ARIA board (the trustee of the CSS, PSS and PSSap civilian schemes). It is the Government’s intention that the boards will merge from 1 July 2010.
This amalgamation into one board requires a deal of collaboration between all parties and your Board is working closely with Government and other key stakeholders to ensure that the outcome from this process will meet the special needs and expectations of the Members of each Scheme.
The Board will keep Members advised of progress in this matter during 2009–10.
Appointment of New Chief Executive Officer
In November 2008 the Board appointed a new Chief Executive Officer, Mr Paul Watson. Mr Watson succeeded Mr John McCullagh who retired from that position after a 17 year association with MilitarySuper, the last five as CEO.
Mr Watson has extensive experience in the superannuation and financial services industries. He has held senior management positions with several of Australia’s industry and public sector funds and senior officer positions within the Department of Finance, the Australian Taxation Office, ComSuper and the Department of Defence.
Thank You
On behalf of the Board and its management team, I wish to thank John McCullagh for his significant contribution and dedicated service to MilitarySuper. He was a fine leader of this organisation and he will be missed. We wish him a happy and fulfilling retirement.
I am grateful for the support over the past year of the former Minister for Defence Science and Personnel, the Hon. Warren Snowdon, MP, the Minister for Defence Personnel, Materiel and Science, the Hon. Greg Combet, AM, MP, and I want to thank the former Minister for Superannuation and Corporate Law, Senator the Hon Nick Sherry for his keen interest and valuable guidance throughout the year. I also recognise and express my appreciation to the Chief of the Defence Force, Air Chief Marshal Angus Houston, AC, AFC, for his constructive ongoing support.
I wish to place on record my appreciation of the efforts and support of my fellow trustees who are doing so much to ensure that MilitarySuper continues to serve the interests of Members and the government at such a high level.
Finally, the Board again acknowledges the immensely important role played by our staff in realising our achievements. We appreciate their professionalism and encourage a continuing high level of performance to meet the challenges of the coming year.
Ongoing Commitment
There are many challenges confronting superannuation funds generally and MilitarySuper specifically over the coming year. The Board is committed to move with the changes and indeed to lead some of these changes with a view to ensuring the best outcomes for Members.
Tony Hyams
Chairman
Military Superannuation and Benefits Board