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ANNUAL REPORT TO MEMBERS and SUMMARY FINANCIAL STATEMENTS ________________________ Year ended 30 June 2020 ________________________ SCHEME STATISTICS Page 1 INTRODUCTION On behalf of the Directors of WSP Downer Retirement Trustee Limited I am pleased to provide the thirtieth Annual Report and Summary Financial Statements for the Scheme, for the year ended 30 June 2020. The Directors held a full meeting in each quarter during the year. At those meetings, reports from the Administration Manager, the Investment Consultant and the Investment Managers, as well as from the Scheme’s external advisers (as required), were received and considered. While the market reaction to the COVID-19 outbreak in 2020 was severe, the subsequent recovery was strong. Taking account of the good results from investment markets prior to COVID-19, the Scheme’s investment performance remained pleasing despite the challenging market environment in 2020. Results remain strong over the medium and long-term. The New Zealand share market had a relatively good year, although the return from most other share markets around the world was low. The downward trend in interest rates resulted in the fixed interest investments earning some positive capital gains along with low levels of interest income. The Balanced Fund concluded the year with a respectable return while the Cash Fund return has remained low, reflecting the fixed interest market. The Directors will continue to focus on the Scheme’s investment performance and strategy and, as in the past, continue to take a long-term view. OPERATION OF THE SCHEME In the year ended 30 June 2020 the total assets of the Scheme decreased to $80.1 million, from $82.5 million in the prior year. Benefit payments continued to exceed contribution in-flows – a feature which is likely to continue into the future as the Scheme remains closed to new members, and which is driving the reduction in the total assets. Total benefit payments of $8.1 million were made in the 2020 year, compared to contribution in-flows of $2.3m. The Scheme’s total net investment income for the year (after tax and investment expenses) was $3.7 million, compared with $4.6 million for the previous year, a consequence of the slightly weaker investment performance this year. Non-investment related expenses were slightly higher than for the previous year. The Directors are aware of the impact that costs have on a decreasing membership base. They will continue to monitor costs very carefully and keep members informed. Page 2 INVESTMENT PERFORMANCE Investment performance in the following two pages is reported as the return after expenses and tax but before the ‘dollar-based charges’. These are operating expenses that are charged to members each year as a fixed amount (typically $140 per member) rather than as a proportion of their account balance. BALANCED FUND The Balanced Fund achieved a return after expenses and tax (but before the dollar-based charges) of 5.11% for the year. This largely reflects strong returns from share markets. A key investment objective for the Balanced Fund is to achieve an average return, after investment expenses and tax, which exceeds inflation (as measured by the movement in the CPI) by at least 1.5% pa over rolling three year periods. This level of outperformance was lowered from 2% to 1.5% in a review of the SIPO in 2019, recognising the outlook for lower returns in the future, primarily due to the low level of interest rates prevailing in the market. The average annual return over the last three years was 6.8% pa, compared to the average annual CPI movement for the same period of 1.5% pa. It follows that the investment objective was achieved by a large margin. The graph below shows the yearly returns achieved by the Balanced Fund after expenses and tax (but before the dollar-based charges), the movements in the Consumer Price Index (CPI) and the SIPO investment objective of CPI plus 2% for each year between 2016 and 2019 and the CPI plus 1.5% for 2020. The Scheme’s returns fluctuate from year to year and consist of both actual returns (interest, dividends and gains/losses on sales of securities) and unrealised returns (gains and losses on the capital value of investments). The Directors and the Investment Managers have no control over substantial movements in capital markets, and in a year where those capital markets decline the value of the Scheme’s assets will be adversely affected. CASH FUND The Cash Fund realised a positive return after expenses and tax (but before the dollar-based charges) of 1.16% for the year which reflects the current very low interest rate environment. The following graph shows the yearly returns achieved by the Cash Fund before investment expenses, tax and the dollar-based charges, the yearly before-tax returns on 90 day bank bills and the movements in the Consumer Price Index (CPI) for each year between 2016 and 2020. Page 3 A key investment objective for the Cash Fund is to achieve an annual return, before investment expenses, tax and the dollar-based charges, which at least equals the 90 day bank bill rate. The Cash Fund’s annual return before investment expenses, tax and the dollar-based charges for the year ended 30 June 2020 was 2.18%, which compares with the return on 90 day bank bills of 0.97% before tax for the year. The Cash Fund’s investment objective therefore was achieved in the year ended 30 June 2020. SUMMARY OF OPERATIONAL ACTIVITES At the overall Scheme level, activities in the last five years are summarised below. Year to 30 June 2020 2019 2018 2017 2016 $m $m $m $m $m Fund start of year 82.5 80.2 78.9 79.2 81.5 Contributions 2.3 2.4 2.6 2.8 3.2 Member withdrawals (8.1) (4.5) (6.9) (8.5) (7.7) Expenses (0.2) (0.2) (0.2) (0.3) (0.2) Investment income 3.7 4.6 5.8 5.7 2.4 End of year 80.2 82.5 80.2 78.9 79.2 The investment income amounts in the table are after deduction of investment expenses and tax. COMMENT FROM THE INVESTMENT CONSULTANT Share markets produced a relatively good return for the year, with the S&P/NZX 50 Index producing a return of 9.9% for the year ended 30 June 2020. Global share markets produced a lower return of 3.4% (fully hedged against currency movements) or 7.1% (in unhedged terms). Both figures are for the MSCI World index, and the latter figure is higher mainly because of the fall in the New Zealand dollar against the US dollar. The continued fall in interest rates helped enhance fixed interest capital returns. As interest rates fall, the income stream from the fixed interest investments is low but those same fixed interest investments gain in value. The Bloomberg NZ Bond Composite Index returned 5.4% for the year, slightly below the return from the Bloomberg Barclays Global Aggregate Index, which returned 5.7% (fully hedged to New Zealand dollars). Cash returns have continued to drop – in line with the New Zealand Official Cash Rate – and the outlook for returns from this sector in the near term is very low. Page 4 THE YEAR AHEAD Global economies continue to hurt as many workers and businesses struggle to return to normal. The world is expected to experience a decline in economic activity not seen since the 1930s. Economic uncertainty remains high: the extent to which Government intervention will continue and the behaviour of consumers and investors are still great unknowns. As a result, there is still considerable uncertainty about the economic landscape once the impacts of COVID-19 and Governmental restrictions fade. Nevertheless, the amount of Governmental support in the form of quantitative easing has been extraordinary and there is currently a good deal of optimism in the markets as prices continue to rise. There are questions around the extent to which this is sustainable, given the continuing hardships of many economies. The New Zealand Treasury has forecast several scenarios depending on how events play out. Under the central scenario, the Treasury expects the local economy to contract through 2020 and 2021. Inflation is expected to be low at 0.8% for the 2020 year although the Treasury predicts it will return to within the lower half of the Reserve Bank’s 1%-3% targeted band in subsequent years. The Reserve Bank of New Zealand held the OCR at just 0.25% in August 2020 and has indicated that it will remain at this level until March 2021. With longer term bond yields low and likely to remain that way, the outlook for fixed interest investments is therefore one of low yields and low overall returns. The Directors continue to believe the Scheme has a sound selection of Investment Managers and the Directors will continue their regular detailed monitoring of the Scheme’s performance. ASSET ALLOCATION The table below shows how the total assets of the Balanced and Cash Funds of the Scheme were invested as at 30 June 2020 and 30 June 2019 Investment sector 30 June 2020 30 June 2019 $m Percentage $m Percentage Australasian Equities 10.5 13.1% 10.7 13.0% International Equities 24.4 30.4% 24.3 29.4% Total Growth Assets 34.9 43.5% 35.0 42.4% New Zealand Fixed Interest 12.1 15.0% 13.0 15.8% International Fixed Interest 18.4 23.0% 19.4 23.5% Cash, net current assets 14.8 18.5% 15.1 18.3% Total Income Assets 45.3 56.5% 47.5 57.6% Total 80.2 100.0% 82.5 100.0% The total net assets of $80.2 million comprised investment assets of $82.0 million, less the net current liability of $1.8 million at 30 June 2020.

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