NAB.005.607.0001
Investment Governance Policy
NULIS Nominees (Australia) Limited
Document Administration Information Schedule Approval Date 24 May 2018 Effective Date 25 May 2018 Next Review Date March 2021 Responsibility for GM, Advice Services Maintaining this Document Details of Document NULIS Nominees (Australia) Limited Approval Authority
NAB.005.607.0002
Commercial in Confidence Investment Governance Policy
Table of Contents
Part A - Principles ...... 5 1. Overview ...... 5 2. Policy statements ...... 7 3. The Trustee’s Investment Philosophy...... 8 4. Role of the Board ...... 9 5. Service Provider responsibilities ...... 9 6. Training...... 9 7. Policy and governance documentation ...... 9 8. Other related reference documents ...... 10 9. Review of the Investment Governance Framework ...... 10 Part B – Standards ...... 11 1. Introduction ...... 11 2. Product and Investment Menu Overview ...... 11 3. Trustee relationships ...... 12 4. Service Provider appointment and monitoring ...... 13 5. Hierarchy Structure for Investment Decision Making ...... 13 6. Investment governance decision making model...... 14 7. Roles and responsibilities...... 14 8. RSE investment strategy ...... 18 9. Investment objectives for each investment option ...... 18 10. Investment strategy for each investment option ...... 19 10.1 Application of the investment strategies ...... 19 10.2 Investment strategy review ...... 20 11. Investment selection ...... 21 11.1 Portfolio Construction approach...... 21 11.2 Criteria for all investment options ...... 22 11.3 Additional criteria for directly and externally managed investment options..... 25 11.4 Additional criteria for cash investment options and cash holding account ...... 26 11.5 Additional criteria for externally managed investment options ...... 26 11.6 Additional criteria for single security investment options ...... 28 12. Investment manager assessment ...... 29 13. Valuation of investment options ...... 29 14. Investment monitoring ...... 29 14.1 Investment Monitoring - Directly managed investment options ...... 30 14.2 Investment monitoring - Externally managed investment options ...... 33 14.3 Investment Monitoring - Single security investment options...... 35 14.4 Stress Testing ...... 35 14.5 Actions taken in response to monitoring ...... 37 15. Member disclosure...... 39 16. Member specific investment matters...... 40 16.1 Member investment limits ...... 40 16.2 In-specie transfers on request from members ...... 43 16.3 Illiquid pensions ...... 45 17. Proxy Voting Policy ...... 46 18. Securities Lending Policy...... 47 Part C - Appendices ...... 48 1. Investment Governance Structure Diagram ...... 48 2. Complexity Framework ...... 49 3. MySuper and NAB Staff MySuper Investment Objectives and Strategy ...... 51 1 Overview...... 51 1.1 Establishment of MySuper ...... 51 1.2 Ongoing governance ...... 51 2 Investment objective ...... 52
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3 Appropriate level of investment risk...... 52 3.1 Risk factors consideration ...... 52 3.2 Setting the level of risk ...... 52 3.3 Liquidity ...... 53 3.3.1 Definitions ...... 53 3.3.2 Measuring and monitoring liquidity ...... 53 3.3.3 MySuper liquidity ...... 54 4 Investment strategy implementation ...... 54 4.1 Investment selection...... 54 4.2 Investment monitoring...... 54 4.3 Valuation of investments ...... 55 5 Diversification and portfolio construction ...... 55 5.1 Portfolio diversification...... 55 5.2 Neutral asset allocation and ranges...... 57 5.3 Diversification within asset classes ...... 57 5.4 Rebalancing ...... 58 6 Stress testing ...... 58 6.1 Overview of the stress testing approach ...... 58 7 Review of the investment strategy ...... 59 8 Investment scale ...... 60 9 Review and document history ...... 60 10 References...... 61 1 Overview...... 62 1.1 Establishment of NAB Staff MySuper ...... 62 1.2 Ongoing governance ...... 62 2 Investment objective ...... 63 3 Appropriate level of investment risk...... 63 3.1 Risk factors consideration ...... 63 3.2 Setting the level of risk ...... 64 3.3 Liquidity ...... 64 3.3.1 Definitions ...... 64 3.3.2 Measuring and monitoring liquidity ...... 64 3.3.3 NAB Staff MySuper liquidity ...... 65 4 Investment strategy implementation ...... 65 4.1 Investment selection...... 65 4.2 Investment monitoring...... 65 4.3 Valuation of investments ...... 66 5 Diversification and portfolio construction ...... 66 5.1 Portfolio diversification...... 66 5.2 Neutral asset allocation and ranges...... 68 5.3 Diversification within asset classes ...... 68 5.4 Rebalancing ...... 69 6 Stress testing ...... 69 6.1 Overview of the stress testing approach ...... 69 7 Review of the investment strategy ...... 70 8 Investment scale ...... 71 9 Review ...... 71 10 References...... 71 4. ESG Risk Management Policy – MySuper Options...... 73
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5. The provisions of the Prudential Practice Guide SPG530 Investment Governance ...... 77 6. Glossary of terms used in this Policy ...... 85 7. Wrap Cash Account Delegation ...... 88
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Part A - Principles
1. Overview The Investment Governance Policy (‘Policy’) applies to the investment activities of NULIS Nominees (Australia) Limited (‘the Trustee’) which is part of the National Australia Bank Group (‘the Group’). The Group means National Australia Bank Limited and its controlled entities. This Policy is maintained by the General Manager, Advice Services. The Policy outlines the Trustee’s requirements for the selection, management and monitoring of investments of the five Registrable Superannuation Entities (‘RSE’) within its business operations. A Glossary of terms used in this Policy has been provided in Appendix 6 for reference. The Trustee’s Investment Governance Framework (IGF) is the totality of structures, policies, processes, systems and people to address the Trustee’s responsibilities with regard to investments of each RSE within its business operations. Refer to Part A Section 7 for a listing of relevant policies and procedures of the Trustee, which together form the central documents in the IGF. The Trustee’s IGF aligns with the Trustee’s Risk Management Framework consisting of the Risk Appetite Statement and Risk Management Strategy. The following diagram sets out the key elements of the Trustees IGF, including the key sections of this Policy and how each section relates to the overall IGF and to the relevant sections of APRA’s Prudential Standard SPS530 on Investment Governance.
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INVESTMENT GOVERNANCE FRAMEWORK POLICY STRUCTURE Trustee Aj>proved Policies (IGP Part A, 57) to be read In Trustee Governance Structure conjunction with: Product and Investment Menu • Outsourcing Policy Including review of Outsourcing Four level H ierarchical Structur e Arrangements at least every 3 years (IGP Part 8, 54) • Conflict Management Polley (when conducting due d[ffgence for Super Wrap & IDPS MasterKey & Plum eacf'I Investment option or investment manager {IGP Part B, Sll) In vestmen t Committee In vestmen t Committee • Risk Management Strategy and Risk Appetite Statement • Liquidity Management Plan (SPSS30.32) • Asset Valuation and Unit Plidng Polley • Derivatives Polley uccessor un • Proxy Voting Polley (IGP Part 8, 517) Disclosure Governance Transfer • Member Investment Limits Polley (IGP Part 8, 516) Committee Committee • Group Model Polley • The use of Group Polley as approved by the Trustee (SPS S30.7} • Polley Review Process per 5PSS30.ll(g} & SPS S30.14 & S30.1S {IGP Part A, 59) Key Elements Other Key Documentation • The role of the Board (IGP Part, A 54) and lnve.stment • Committee Charters {IGP Part 8, S7) Committee.s {see Committee Chart ers and as • My5uper and NAB Staff MySuper Investment Objective and summarised in JGP Part 8 S7 (SPS530.6) Strategy {IGP Part c. S3} SPS S30.21} Trustee of Registrable • The IGP Part B, S2 summaries for each RSE the product • Investment Consult ing and Portfolio Management Deed Superannuation En tit les segments, benefit st ructure and the current • Superannuation Business Services Agreement investment menu for each RSE MLC Super Fund MLC Pooled Superannuatiof'I Trust MLC Superannuation Fund PremtumChoic:e Retirement Service DPM Retirement Service
NULIS INVESTMENT PHILOSOPHY
INVESTMENT GOVERNANCE POLICY (IGP) PEOPLE Service Providers {related and unrelated) appointed to PROCESSES AND SYSTEMS undertake various operations (IGP Part A, 54 and Part 8, S7) The ktvestment Governance Dedsk>n Making Model Service Provider appointments are made under the Trustees The Trustee's approach to governing Its Investment In accordance wtth SPS Outsourcing Polley (IGP Part 8, 54) and, where a related party S30- this model drives the pt'OCHSe$, systems and standards is appointed under the Conflict Management Policy and the documented In IGP Part B S6 Conflicts Management Standard Operating Procedure • Overarching Investment Strategy (SPS 530.ll(c} and for each investment Under SPS 530.13 appropriate investment governance training Option (SPS 530.17 and SPS 530.20) See JGP Part 8, 58, 10 • Investment Strategy for each MySuper hwestment Option {SPS530.21} See is in place to the support the invest ment activities undertaken IGP Part 8, SlO, Part c for the Trustee (IGP Part A, S6) • The requirements for setting the hwestment objectives for each Role Statements and reporting structures for all roles related Investment option offered by the R5E licensee (SPS 530.U(a} and SPS to investment activities in accordance with SPS 530.11 {e) and 530.16) See JGP Part 8, S9 maintained separately to the IGP. • The requirements on hwestment dlVerslflcatlon {SPS 530.18) See IGP Part Investment delegations and monitoring requirements as per 8, s 10.1 the Trustees delegation framework and as set ou t in the • The hwestment selection process havfng regard for regulatory, product, contractual documentation with service providers administration and other crlterla (SPS 530.17, 530.22 and 530.23) See JGP Key Investment Service Providers And Functions Part 8, Sll) JANA Investment Advisers Pty limit ed · Consultant • Investment monitoring and hwestment strategy revfew requirements and NAB Asset Management Services limited - Portfolio standards (SPS 530.11(1), 530.24, 530.25, 5330.26, 530.27 and 530.21!) See Management & Implementation IGP Part 8 Sl0.2, 514 ThreeSixty Research- Research • Regard and approach to Investment stress testing (SPS 530.19, 530.29, National Wealth Management Services limited - 530.30 and 530.31) See JGP Part B, Sll.2, Sl4.4 Superannuation Business Service Pr ovider National Australia Bank Asset Servicing • Custodian
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The Policy has been prepared having regard to the Superannuation Law, licence requirements, superannuation prudential standards, regulator guides and relevant policies and processes of the Group and the relevant terms of the RSE’s Product Disclosure Statements (‘PDS’). The Policy captures the Trustee’s Investment Philosophy which informs product design, the investment menu and investment option design. The Trustee has outsourced some of the day-to-day operations of the RSEs under its trusteeship to various related and non-related party1 Service Providers2 (refer to section 3 of Part B for an explanation of these relationships). Each Service Provider, its delegates and their employees must act in accordance with this Policy. Whilst the Trustee has outsourced certain activities to Service Providers, it retains ultimate accountability for sound and prudent management of the investments of each RSE, including the actions of each Service Provider that are performed on its behalf. The Trustee Board is ultimately accountable for the investment governance framework.
2. Policy statements The Trustee has adopted the following formal policy statements. The Trustee will at all times and to the best of its ability in respect of each of its RSEs: · comply with the requirements of the Superannuation Law, Superannuation Prudential Standard SPS 530 Investment Governance (‘SPS 530’) and other relevant APRA Prudential Standards; · formulate and give effect to an investment strategy for the whole of each RSE and for each investment option3 in accordance with section 52(6) of the Superannuation Industry (Supervision) Act 1993 (‘SIS Act’); · formulate or adopt specific and measurable investment objectives for each investment option offered within each of its RSEs; · maintain a liquidity management plan; · exercise due diligence in developing, offering and regularly reviewing each investment option; · maintain appropriate processes for investments and measurement of performance and risk, assessment with reporting on an ongoing basis; · ensure that it has the necessary skills, expertise and resources to appropriately assess proposed investments and to implement, manage and monitor those investments; · ensure the investment options offered to each member facilitate adequate diversification of their superannuation investment; · review the investment objectives and investment strategies on a periodic basis; · monitor and assess regularly the performance, cost and quality of services provided by each investment related Service Provider in meeting its contractual obligations to the Trustee; · periodically assess the performance, cost and quality of Product Providers with whom the Trustee invests a significant proportion of assets under its management; · have measures in place to support compliance with any investment reporting standards established by the Australian Prudential Regulation Authority (‘APRA’) under the Financial Sector Collection of Data Act 2001; · ensure that role statements are in place for each role which relates to the investment activities of the Trustee and includes details of the responsibilities and reporting structures attributable to
1 A related party refers to an associate of the Trustee as defined in s.10 of the SIS Act. 2 Superannuation Prudential Standard SPS 231 defines ‘service provider’ as an entity which provides outsourced activities on behalf of the Trustee. 3 An ‘investment option’ refers to a pooled investment arrangement, an individual share or individual bond which is offered to members.
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that role1; and · maintain an inventory of all Trustee Board policies relating to investment activities.
3. The Trustee’s Investment Philosophy Whilst certain aspects of the investment philosophy are applicable to all RSEs where NULIS is the Trustee, the investment philosophy has been formulated with the directly managed investment options within the MLC Super Fund in mind. The Trustee’s investment beliefs include:
1. The key objective of the MLC Super Fund (“the Fund”) is to support the retirement income needs of members. 2. The Fund will provide flexibility of choice in the design of the investment menu to allow for the varying constraints and expectations of members. The Trustee believes in simplicity over complexity and will only manufacture additional investment options where there is a clear differentiated customer need. 3. The Trustee expects commensurate return for risk in all portfolios. Efficient multi-asset portfolios must be intended to offer the highest expected return for a defined level of risk or the lowest risk for a given level of expected return. 4. The Trustee believes that the asset allocation of the option is paramount in achieving the long- term objectives and will set a neutral asset allocation and/or ranges for asset allocation to ensure an ongoing proper mix of assets in each option. 5. The Trustee believes in the value of ongoing professional management and has appointed a specialist Portfolio Manager to manage all implemented options, with responsibility for implementing asset allocation within allowed ranges, manager selection and ongoing monitoring within a robust governance framework. 6. The Trustee recognises that opportunities may arise to add value and/or reduce risk through tilts in asset allocation. The Trustee expects the Portfolio Manager to manage these tilts and consider ‘whole of portfolio’ risk management with an expectation that the value added to members will exceed costs. 7. The management of risk includes proper diversified portfolios (across asset classes and across geographies, managers, counterparties, processes within asset classes) that avoid unreasonable exposure to any single risk factor. This offsetting of risk is expected to give a smoother investment experience for members. 8. Portfolios will be managed in a structurally sound way that ensures all elements compliment the overall objective and enhance the return-risk outcomes at the total portfolio level while minimizing cost impact to members. For example, gearing within one asset class should not negate the function of another asset class. 9. All costs matter for the Fund member and so careful attention must be given to ensure that investment costs are outweighed by the expected returns from any activity. The Trustee will set a maximum cost of investment manufacture for each option and expects the Portfolio Manager to maximise the return/risk profile for the set fee budget. The cost of an active approach should only be incurred where there is an expected net benefit to members through additional return and/or reduced risk. 10. The Trustee recognises that there may be circumstances where members benefit from a related party managing members’ assets. In such circumstances, the Trustee will be engaged on the decision and will ensure any potential conflicts of interest are managed and disclosed appropriately. In cases when the Fund is the sole investor, the Trustee will have approval rights. 11. The Trustee expects diversification across investment managers and entities in a multi asset portfolio so that there is no undue reliance on any single entity (including its related parties). 12. The Trustee recognises the long-term nature of superannuation money and supports the use of less liquid investments for the purpose of diversification and risk/return benefits. However, these investments must never compromise the required liquidity limits of each option to ensure the Fund meets its obligations and contains a diversified mix of investments through all market environments. 13. The Trustee expects multi asset portfolios to have a level of foreign currency exposure in line with the future consumption profiles of members. The Trustee recognises that foreign currency can give useful diversification qualities for portfolios and potentially enhance returns whilst also
1 For this purpose, the Trustee has documented the role responsibilities of the entities or business units within the Group who perform functions relevant to the investment activities of the Trustee.
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exposing members to added risks and will manage this risk accordingly. Currency exposure should not compromise nor dominate the risk objective of the portfolio at any time. 14. The Trustee believes that considering Responsible Investment factors as part of decision-making is consistent with its responsibility of acting in the best interests of members and details its approach through a Responsible Investment Policy. 15. The Trustee engages the services of an Investment Consultant to aid the Trustee on investment matters including monitoring the performance of all portfolios and reviewing the decisions of the Portfolio Manager. This is intended to ensure that the Fund is being managed according to best practice standards.
4. Role of the Board SPS 530 requires that, at a minimum, the Board of an RSE Licensee: · approve an investment strategy for the whole of an RSE and each investment option offered in that RSE, that reflects the RSE Licensee’s duties to beneficiaries; · approve investment objectives for each investment option offered in an RSE; · monitor and assess regularly whether the investment objectives are being met; and · take appropriate and timely action regarding information contained in reports on investment matters. To assist with satisfying its obligations under SPS 530, the Trustee has delegated certain responsibilities to its investment committees, currently known as the MasterKey and Plum Investment Committee (‘MPIC’) and Super Wrap & IDPS Investment Committee (‘SWIIC’) (together ‘Investment Committees’), the details of their responsibilities is outlined in each of their Charters. Refer to section 7 of Part B for a summary of the responsibilities.
5. Service Provider responsibilities The Trustee may from time to time appoint Service Providers to undertake certain activities on its behalf. Each such arrangement will be supported by a specific Service Level Agreement (‘SLA’). The Trustee ensures that Service Providers are made aware of the contents of this Policy and monitors Service Provider compliance with this Policy. Each Service Provider must implement and embed robust measures to carry out its designated responsibilities to the Trustee in relation to investment matters in accordance with this Policy. These arrangements are communicated to its employees, contractors and representatives and included in their education and training programs. The Trustee must ensure the Service Provider is made aware of the regulatory obligations which apply to the investment activities of superannuation trustees and require the Service Provider to comply with those obligations. Each Service Provider will, as may be required, periodically attest to the Trustee that it has satisfied its obligations under the respective SLAs.
6. Training The Trustee will have measures in place to ensure that all persons who hold roles related to the investment activities of the Trustee1 are aware of and understand: · the requirements of the Trustee with respect to the Investment Governance Framework; · the regulatory obligations (including trustee covenants contained in the SIS Act) which are relevant to the role they perform on behalf of the Trustee; and · the importance of complying with the above described matters.
7. Policy and governance documentation
1 This includes personnel of service providers who are involved in decision making or have managerial responsibility in respect to the investment activities of the Trustee.
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This Policy forms the core of the Investment Governance Framework. It should be read in conjunction with the following policies and procedures of the Trustee which also form part of the Investment Governance Framework1:
· MasterKey and Plum Investment Committee Charter · Super Wrap & IDPS Investment Committee Charter · Liquidity Management Plan · Asset Valuation and Unit Pricing Policy · Derivatives Policy · Investment Consulting and Portfolio Management Deed · Class Actions Policy · Investment Fee & Buy/Sell Spread Materiality Policy (contained within the Product Management Standard Operating Procedures) · Arbitrage & Trading Activity Policy (contained within the Product Management Standard Operating Procedures) The Trustee will provide copies of relevant Policies referred to in Section 7 to Service Providers to enable them to comply with their obligations to the Trustee. Where the Trustee utilises group policies or functions, the Board (or Investment Committee as appropriate) will approve the use of group policies and functions and will ensure that these policies and functions give appropriate regard to the Trustee’s business operations.
8. Other related reference documents The documents listed in the above section should be read in conjunction with the following Policies, Standards, and Guides as appropriate: · The Trustee’s Outsourcing Policy · The Trustee’s Conflicts Management Policy · The Trustee’s Risk Appetite Statement · The Trustee’s Risk Management Strategy · Superannuation Prudential Standard SPS 530 Investment Governance · Superannuation Prudential Guide SPG 530 Investment Governance · Superannuation Prudential Guide SPG 531 Valuation · FSC Standard Risk Measure Guidance Paper for Trustees · FSC Standard 13 – Voting Policy · FSC Standard 20 – Superannuation Governance Policy The Trustee will provide copies of relevant Policies referred to in this section to Service Providers to enable them to comply with their obligations to the Trustee.
9. Review of the Investment Governance Framework The Trustee must ensure that the appropriateness, effectiveness and adequacy of its Investment Governance Framework is subject to a comprehensive review by operationally independent, appropriately trained and competent persons at least every three years.
1 It is the intention of the Trustee that all policies and procedures be consistent. However, any inconsistency found should be referred to the Office of the Trustee for guidance regarding the correct application.
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Part B – Standards
1. Introduction These Standards expand on the Principles in Part A of this Policy. The Standards outline the requirements the Trustee has for the selection, management and monitoring of investments of each RSE for which it is responsible. These Standards apply to the Trustee Board, its Committees and all persons who hold roles which relate to the investment activities of the Trustee, including Service Providers (and their employees, contractors and representatives). This includes those roles associated with the formulation and maintenance of investment strategies, and the roles that have decision-making authority and responsibility in that process.
2. Product and Investment Menu Overview NULIS is the Trustee for five Responsible Superannuation Entities (‘RSEs’). A summary of their product segments and benefit structure is captured in the table below.
RSE MLC Super Fund (“MLCSF”) MLC Pooled Superannuation Trust (‘MLC PST’)* MLC Superannuation Fund (‘MLCSNF’)* PremiumChoice Retirement Service (‘PC’) DPM Retirement Service (‘DPM’) Product Suites Plum Super options (including NABGSF and MLC Wrap, MLC Navigator and Badges, including employer specific options) MLC MasterKey on and off sale, commission and non-commission Corporate Super and Retail Super Product, versions. including on and off sale, commission and non-commission versions. Product Corporate Super Personal Super Segments Personal Super Pension Pension Only available for use in conjunction with a financial adviser1
Benefits Accumulation Accumulation Defined benefits – lump sums and pensions Account based pension Account based pension Individual insurance for life cover, total and Individual insurance for life cover, total and permanent disability and salary continuance permanent disability and salary continuance Group Insurance for life cover, total and Group Insurance for life cover, total and permanent disability and salary continuance permanent disability and salary continuance
Life Policies including whole of life, endowment, pure endowment and life assurance (closed to new members) Current · A default option (which may differ · A comprehensive range of managed Investment Menu for certain Plans) for those funds, members who do not choose their · a comprehensive range of ASX listed investment option, securities including exchange traded · a limited range of managed funds, funds, · fixed rate funds (closed products · a range of separately managed only), accounts, · term deposits for investors who · term deposits and interest rate wish to choose their investment securities. option.
1 The client’s account will remain active should the client choose to remove their financial adviser.
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* MLCPST is a pooled superannuation trust used as an underlying vehicle for MLCSNF. Members may not invest directly in the MLCPST. Refer section 3 for further details.
3. Trustee relationships The Trustee has delegated certain day-to-day operations of the RSEs under its trusteeship to various related and non-related party Service Providers. This includes outsourcing the responsibility for the execution of investment decisions for the Trustee, and enlisting the expertise of professionals to obtain the advice necessary to enable it to fulfil its investment responsibilities to members1. The duties and obligations of each Service Provider are set out in the contractual terms of various SLAs and agreements. Whilst the Trustee has outsourced certain activities to Service Providers, the Trustee retains ultimate accountability to members for the actions of each Service Provider. The RSEs and Service Providers (relevant to this Policy) are as follows:
RSE MLC Super Fund MLC PST MLCSNF PC DPM Superannuation National Wealth Management NWMSL Business Services Services Limited (‘NWMSL’) Provider
Custodian National Australia Bank Asset Servicing Ausmaq
Investment JANA Investment Advisers Pty Limited N/A Consultant (‘JANA’) for directly managed options Portfolio Manager NAB Asset Management Services Limited N/A for directly managed (‘NSL’) options Investment Adviser ThreeSixty Research ThreeSixty Research for externally managed and single security options# #ThreeSixty also provide monitoring services on directly managed options in the MLC Super Fund. The Trustee manages the investments of each of its RSEs as follows:
MLC Super Fund NULIS has appointed JANA to be its investment consultant and NSL to be its portfolio manager in relation to the directly managed (implemented) options in the MLCSF. JANA provides advice to assist the Trustee to set its investment objectives and investment strategy for each directly managed investment option and for the fund as a whole. NSL then implements portfolios (primarily through unit trusts issued by MLC Investments Limited) designed to meet those investment objectives and in accordance with the investment strategy. JANA also conducts investment manager research to assist NSL in selecting investment managers for the directly managed options within MLCSF.
NULIS as trustee of the MLCSF primarily invests in managed investment schemes issued by MLC Investments Limited as an efficient means of holding and organising its investments in conjunction with NSL’ portfolio management services. MLC Investments Limited has appointed NSL as its Investment Adviser and Portfolio Manager.2
NULIS also has some directly held assets, primarily private equity, currency overlay, fixed income,
1 All outsourced arrangements (including related party agreements) which the Trustee has in place are supported by a written agreement which complies with the Trustee’s Outsourcing Policy. A list of all arrangements which the Trustee has in place is included in the Trustee’s Outsourcing Policy. 2 Under the Investment Advisory and Portfolio Management Deed.
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Commercial in Confidence Investment Governance Policy external options on the MasterKey menu, and a small number of other ad hoc investments.
Assets of Defined Benefit plans or corporate plans are each invested in line with advice received from the respective RSE Actuary for the plan or corporate plan to ensure any future liabilities or obligations can be met.
NULIS utilises the services of ThreeSixty via NWMSL to provide due diligence and monitoring services in relation to the externally managed and single security options within MLCSF. ThreeSixty also provide monitoring services on directly managed options within the MLC Super Fund.
MLC PST, MLCSNF, DPM and PC NULIS establishes investment options for members of the MLCSNF in the MLC PST which invests in managed investment schemes, direct equities and direct fixed interest investments. It also establishes investment options for members in DPM and PC through managed investment schemes, direct equities and direct fixed interest investments.
4. Service Provider appointment and monitoring The Trustee’s Outsourcing Policy prescribes steps which are undertaken by the Trustee prior to appointing a Service Provider and ongoing monitoring and reporting requirements in relation to the performance of each Service Provider in meeting its obligations to the Trustee as outlined in the respective SLA. The Trustee reviews all outsourcing arrangements at least once every three years, or more frequently if required, to ensure that the Service Provider and the services outsourced to that Service Provider remain appropriate.
5. Hierarchy Structure for Investment Decision Making This Policy is a key component of the Investment Governance Framework since it outlines requirements for the selection, management and monitoring of investments of the RSEs. Investment related matters not addressed in this Policy such as liquidity management, derivatives and valuation are addressed in the policies and processes listed in section 7 of Part A of this Policy. The Trustee’s Investment Governance Framework includes a four level hierarchical structure for the selection, management and monitoring of investments of each RSE. This structure is outlined below and is represented in a diagram in Part C Appendix 1.
1. RSE The Trustee has established a common overarching investment strategy which is shared by all RSEs (see section 8 of Part B). This is supported by the investment strategies in place for the investment options offered within each RSE.
2. Investment option types The processes for the selection, management and monitoring of investments vary based on whether an investment option is directly managed, externally managed or is a single security investment option as defined below: · Directly managed investment option: an investment option which has been constructed for the purpose of satisfying an investment objective prescribed by the Trustee and for which it has ultimate responsibility with regard to its management and ongoing monitoring. · Externally managed investment option: a pooled investment vehicle (such as a managed investment scheme, life policy investment option or separately managed account (‘SMA’)) for which the Trustee has no contractual right to give directions as to the investment strategy for achievement of the stated investment objective. · Single security investment option: an individual share, term deposit, bond or other security.
3. Investment option category The investments of the RSEs have been grouped into different investment option categories. For multi asset/sector investments, the categories are based on the various segments of the investment risk
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Commercial in Confidence Investment Governance Policy spectrum (conservative – aggressive) and other investments are grouped on the basis of specific asset classes (e.g. cash, fixed interest, property, equities). Stress testing (as described in Part B Section 14.4) is conducted periodically, at a minimum, for each investment option category.
4. Investment option sub-category The investment option categories have been further segmented into sub categories. These sub-categories recognise that some investments have different characteristics to other types of investments within the same category. Where the Trustee deems it appropriate, limits may be imposed on the amount of investment exposure individual members will be permitted to hold in particular types of investment options (e.g. hedge funds and mortgage funds). Investment limits will generally be established at the sub-category level, but may be imposed on individual investment products in certain circumstances. Refer to section 16.1 for details.
6. Investment governance decision making model The below diagram provides an overview of the Trustee’s approach for governing its investments in line with its Hierarchy Structure for Investment Decision Making and in accordance with SPS 530. This diagram should be referenced when reviewing the detail explanation contained in sections10 to 16 of this Policy.
7. Roles and responsibilities The key responsibilities and accountabilities for the management of investment related matters as set out in relevant charters and contracts are captured in the table below. The Trustee requires that all Investment-related roles in each of the key accountability areas have documented responsibilities and reporting structures.
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Area Role/responsibility Investment On behalf of the Trustee in accordance with the MPIC and SWIIC Charter Committees · Approve the addition or removal of investment options to the investment menu of RSE products in consideration of recommendations prepared in accordance with this Policy (other than MySuper products which must be approved by the Board). · Monitor the performance of the investment options (including MySuper options) within each RSE product which has an ‘Approved’, ‘Hold’ or ‘Closed’ status. · Review the outcomes of periodic stress testing (including for MySuper options) and give consideration to the continued appropriateness of relevant investment strategies. · Apply a ‘Hold’, ‘Closed’ or ‘Sell’ status to investment options which are no longer considered suitable for offer to members and, where required, approve an alternative investment option to which member benefits must be transferred. · Review the adequacy and effectiveness of the investment strategy for each investment option (including MySuper options) of each RSE at least annually or where a ‘trigger event’ occurs (see Part B Section 10.2). · Make decisions in relation to the revaluation of securities, in accordance with this Policy. · Review and approve or decline requests by members to exceed the member investment limits specified in this Policy. · Monitor the performance of, and exercise of delegations to, investment-related service providers including JANA and NSL. · Monitor the delegations made to the General Manager, Retail Super and Investments under this policy. · Upon a request by ThreeSixty, provide a directive on how the Trustee will exercise its proxy voting rights for the relevant investment in accordance with the proxy voting policy. · Monitor ThreeSixty’s use of its delegated authority to: o add or remove ASX listed securities to/from the investment menu of RSE products; o approve non-related externally managed investment options that falls within their delegation detailed later in this table; o apply ‘Hold’ or ‘Closed’ ratings to investment options which do not meet specified criteria; and o take action in reference to the proxy voting policy. · Make recommendations to the Trustee Board (upon request) regarding the appointment of investment-related service providers. · Make recommendations to the Trustee Board regarding the following decisions which fall outside the responsibility of the Committee: o investment decisions which could have a major business impact on members, the RSE and or Trustee; and o any changes to Board approved investment criteria or policies.
Risk and Audit On behalf of the Trustee in accordance with the RAC Charter, approve and monitor Committee the suitability of the investment strategy for defined benefit assets, and changes to (‘RAC’) it, in consultation with the relevant RSE Actuary. The Office of On behalf of the Trustee and in accordance with the OTT Charter: The Trustee · Ensure that this Investment Governance Policy is kept up to date to reflect the business operations of the Trustee in relation to investment matters. · Approve minor updates to this Policy including changes made to reflect matters approved in any other form by the Trustee. · Ensure the Trustee’s Investment Governance Framework is subject to review at least every three years or as otherwise required. · Ensure that the requirements of this Policy are effectively communicated to relevant staff of the Superannuation Business Services Provider and other Service Providers (including through education and training).
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Area Role/responsibility · Monitor the performance of relevant Service Providers against the respective outsourcing agreement. · Act as an escalation point for any significant issues involving the investment activities of the Trustee. · Act as an escalation point for any uncertainty about the application of this Policy. · Exercise the delegations outlined in this policy. NWMSL As the Superannuation Business Services Provider and in accordance with the SLA in relation to MLC Super Fund and MLCSNF (including the MLCPST), DPM and PC: · Product teams to assist the Trustee with the commercial design and strategy for the investment menus for the different products within each RSE. · Reporting liquidity against the Trustee’s liquidity tolerance levels as set out in the Trustee’s RAS each quarter. · Enforcement of member investment limits and the review of compliance with the investment limits at least twice yearly, and reports findings and identifies actions taken to the relevant Investment Committee. · In respect of a number of legacy superannuation products issued by MLC Limited, NWMSL provide services to NULIS including certain administrative processes typically undertaken by a trustee, such as issuing notices and processing claims. · Attendance at Trustee Board and Investment Committee meetings as requested. · Provide input into determining the level of fees for new business and ongoing monitoring of fees for existing business. · Monitoring and reporting to the Trustee Board or Investment Committee on cash investment options (including the cash holding account) that consist of Stable Retail Deposits with one or more ADIs.
On behalf of the Trustee in accordance with its SLA in relation to MLCSNF, DPM and PC only, NWMSL: · sources appropriate and timely valuations of investment options, · provide members with website based access to ASX Listed information and provide financial advisers with access to company profiles. ThreeSixty* On behalf of NWMSL, ThreeSixty: · Conducts research and due diligence in relation to prospective externally managed and single security investment options and recommending to the Trustee the approval of new investment options. · Monitors and reports to the Investment Committees on the performance of the investment options of each RSE as required, and makes recommendations regarding their continued approval. · Reviews and provides recommendations to the Investment Committees in relation to the continued appropriateness of the stress-testing program and methodology used to test the performance of each investment option category including the stress test scenarios, for externally managed and single security options. · Reports to the Investment Committees on the outcomes of stress testing performed in relation to each of the externally managed and single security investment option categories. · Has delegated authority to add or remove ASX listed investments to/from the investment menu of MLCSNF, MLCPST, DPM and PC which meet relevant criteria. · Has the delegated authority to ‘Approve’ any non-related externally managed investment option that falls within the Low Complexity sectors with the exception of options in the Responsible Investment sector as shown in Part C Section 2. · Has delegated authority to apply an immediate ‘Hold’ or ‘Closed’ rating to any externally managed or single security investment option that no longer meets the relevant criteria. · On request, recommend an alternate investment option where an investment option is assigned a ‘Closed’ or ‘Sell’ rating by the Investment Committees.
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Area Role/responsibility · Reports to the Investment Committees on its use of any delegated authorities. · Has responsibility for the implementation and monitoring of the proxy voting policy, including recordkeeping and reporting to the Investment Committee, and. · Attends Trustee Board and Investment Committee meetings as requested. JANA As the Investment Consultant and in accordance with the Investment Consulting and Investment Portfolio Management Deed (‘ICPM Deed’), in relation to directly managed Advisers investment options, JANA: (‘JANA’) · Recommend investment objectives and long term asset allocation ranges of such investment options. · Carries out research and due diligence on investment managers for use by NSL. · Perform at least an annual review of investment objectives and investment strategies of each option, including stress and liquidity testing; · Provides consulting advice services to the Trustee as required (including the preparation of tailored quarterly reports, · Provides advice on significant investment issues and providing research material to aid with the preparation of communications). · Attend and/or present at Trustee Board and Investment Committee meetings as requested. NAB Asset As the Portfolio Manager and in accordance with the ICPM Deed; in relation to Management directly managed investment options, NSL: Services · Constructs portfolios designed to meet the Trustee approved investment Limited (‘NSL’) objectives within the Trustee approved neutral asset allocation ranges, by working with MLC Investments Limited or other Product Providers or entering into investment management agreements directly on behalf of the Trustee. The Trustee recognises the use of different portfolio construction approaches; which currently includes the ‘Investment Futures Framework’ used by the NSL Capital Markets Research team and the ‘Valuation, Fundamentals, Sentiment approach’ used by the NSL Institutional Portfolio Management team. · Carries out initial and ongoing operational due diligence activities in relation to investment managers, · Appoints, monitors and removes investment managers as deemed appropriate for the options, · Monitor compliance with mandates for directly appointed investment managers, · Provide reporting services to the Trustee as required, and · Attends Trustee Board and Investment Committee meetings as requested. General In accordance with the Trustee’s delegated authority: Manager, Retail · Has authority to approve the in-specie transfer of investments that do not meet Super and the standard in-specie acceptance criteria, subject to additional criteria in Investments accordance with this Policy, · Has authority to approve member requests to exceed member investment limits in accordance with this Policy, · Reports to the Trustee each quarter on the use of their delegation to approve in- specie transfers and member requests to exceed member investment limits. · Has authority to transfer members from pension to superannuation accounts where the pension account does not meet the liquidity requirements stated in this Policy. · Has authority to approve the on-going re-negotiations of the agreement with NAB to retain cash account holdings in the NAB Professional Funds Account, this is subject to the terms outlined in Appendix 7.
Risk Wealth · Periodically performs risk oversight activities covering the Risk Management Framework. Internal Audit · Reports on aspects of the effectiveness of the Trustee’s Investment Governance Framework as agreed with the Board from time to time.
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Area Role/responsibility WM Legal · Provides advice on whether the Trustee has satisfied its legal requirements in relation to investment governance as requested.
* NWMSL utilises the services, of ThreeSixty Research Solutions (‘ThreeSixty’), a division of GWM Adviser Services Limited, in performing investment related services for the Trustee.
8. RSE investment strategy The Trustee has an overarching investment strategy1 for all of its RSEs: Provide members with a choice of investment options to enable them to invest according to their own needs and circumstances and where applicable to an RSE or to a segment of an RSE, a suitable investment option where they do not make an active choice. Accordingly, the Trustee offers, as appropriate to the targeted market segment or profile of members of each RSE product, a range of investment options that allows members to, among other things, diversify their superannuation investment portfolio across asset classes, geographic regions, investment managers and investment styles. An overview of the current investment menus2 within each RSE is provided in section 2 above. The investment strategies for all of the investment options offered within an RSE (each of which have regard to the trustee covenants listed in s.52(6) of the SIS Act) support the investment strategy for the whole of that RSE. The addition of any new investment option must support the RSE Investment Strategy.
9. Investment objectives for each investment option The Trustee will set investment objectives for each investment option offered within each of its RSEs. The investment objectives establish the desired investment outcomes of the respective investment option; they will be clearly articulated, measurable and formally documented. They should ordinarily include a clear expression of a measurable target investment return3 and a measurable target level of risk exposure4. Investment objectives of directly managed options are documented in the PDS for the product offering the investment option and in the Schedule of Options maintained by JANA and the Trustee. For externally managed investment options, if the Trustee is satisfied after giving due consideration, it adopts the investment objectives established by the Product Provider of the particular investment option (for example, as outlined in a PDS of a managed investment scheme). When making a decision as to whether to adopt the investment objectives of a Product Provider, consideration is given to such matters as: · Whether the Trustee can establish a sufficient understanding of the level and sources of expected returns that the investment option is aiming to achieve, and the level and sources of risk associated with that investment option; · Whether the target return objective appears to be reasonable and achievable in respect to its risk objective, and that the associated level and sources of risk are acceptable; · Whether the Trustee can reasonably monitor performance of the investment option against the investment objectives; · Whether the investment objectives are suitable for the targeted market segment for the respective RSE product(s); and
1 An investment strategy is the Trustee’s plan for making, holding and realising fund assets. 2 An investment menu refers to the suite of investment options which are offered to members of a particular RSE product. 3 A return objective provides a point of reference against which to evaluate investment performance and assists current and prospective members to understand the expected investment outcomes of an investment option. It should generally comprise of a defined investment horizon which is either stated as a return relative to a quantifiable benchmark or an absolute percentage return. 4 A risk objective assists current and prospective members to understand the likelihood of the return objective not being achieved. A risk objective may comprise of for example a qualitative statement about the level and sources of risk to which an investment option is likely to be exposed; or reference to the variability of returns over the defined investment horizon.
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· Whether the investment objectives complement the existing suite of investment options offered and is suitable for the size, business mix and complexity of the respective RSE.
If the investment is a single security investment option, the Trustee generally describes risk exposures and other characteristics of the investment option.1
10. Investment strategy for each investment option An investment strategy is the Trustee’s plan for making, holding and realising fund assets consistent with the investment objectives for the respective investment option.
The Trustee must document how it has regard to the investment covenants contained in section 52(6) of the SIS Act2. For the investment strategy of a MySuper investment option, the Trustee will also document how the investment option: · is diversified over multiple risk factors and sources of return; · complies with sections 29VN(d)(i) and 29VN(d)(ii) of the SIS Act; and · complies with rules for the relevant permissible fees in a MySuper product.
Please refer to Part C Appendix 3 for information in relation to the MySuper options.
For the investment strategy of a MySuper investment option please also refer to Appendix 4 – ESG Risk Management Policy.
10.1 Application of the investment strategies Directly managed investment options For directly managed investment options (e.g. MySuper), the Trustee sets the investment strategy on advice from JANA. In formulating an investment strategy, the Trustee has regard to paragraphs 4-60 of SPG 530 Investment Governance (‘SPG 530’). Setting the investment strategy generally includes the setting of long term asset allocation ranges, the permitted types of investments and permitted leverage for an option.3
The Trustee, when determining an appropriate level of diversification within an investment strategy: (a) identifies the risk factors, and sources of return with which the risk factors are associated; (b) where the strategy includes multiple assets and/or asset classes, identifies how sources of returns are expected to interact, the variability in these interactions and the impact of these interactions on the overall diversification of the strategy in different market conditions; (c) determines the target exposure to the risk factors; and (d) determines the asset classes and/or individual assets that it will invest in to achieve the desired risk exposure and whether making, holding and realising investments in those asset classes and/or individual assets can be implemented in a manner consistent with the interests of, and the Trustee’s duties to members.
1 APRA SPG 530 para 16 states “Where it is not practical for an RSE licensee to articulate investment objectives for direct investments [such as an individual listed security, term deposit or bond] APRA expects an RSE licensee would nevertheless describe risk exposures and other characteristics of the investment option.” 2 APRA has provided guidance with regard to what additional information or criteria may be appropriate for inclusion in the Investment Strategy in SPG 530. 3 The investment strategy of directly managed options is documented in relevant member disclosure material and in the Schedule of Options maintained by JANA and the Trustee.
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Externally managed investment options When considering adding new externally managed investment options to an investment menu, the Trustee must consider the suitability of the investment strategy of the investment product, to be offered as an investment option1.
Single security investment options For single security investment options, the suitability of the security as an investment strategy will be assessed as a class of investment options (e.g. term deposits, listed securities), consistent with the approval criteria in section 11.6.
10.2 Investment strategy review The formulation of an investment strategy incorporates a broad range of internal and external factors, which are based on circumstances and forecasts made at a particular point in time. These factors are subject to change, and may render the risk and return exposures of an investment strategy less appropriate or effective. Accordingly, the investment strategy of each investment option is reviewed against its investment objectives on at least an annual basis. The review considers amongst other things whether the investment objectives remain appropriate given, potential structural changes in the economy and investment markets, and/or the target market segment or the profile of existing members. It should also consider the key drivers of the investment strategy to ensure that the overall strategy remains consistent with the investment objectives. An interim review of the relevant investment strategy may be warranted (in addition to the annual review) where any of the following ‘trigger events’ occur: · The results of monitoring or stress testing indicate that the investment strategy is no longer appropriate; · Identification of unusual patterns in investment performance given the nature of a particular investment option and prevailing market conditions; · Material change to the liquidity status of underlying investments; · Changes to the economic climate and the conditions of specific markets which alter the risk- return outlook for asset classes; · Changes in the long term outlook, opinions or assumptions of JANA, ThreeSixty or research houses that have been relied upon indicate that the investment objectives are not achievable or conversely that the return and risk expectations of the investment option can be improved while still meeting the investment objective; · For externally managed options, significant change to any of the qualitative factors considered during the investment selection (refer to section 11 of Part B); including but not limited to: o issues with fund size such as large outflows relative to FUM, or small FUM which could impact adversely on members; o changes to investment objectives, investment strategies or guidelines, explicit fees, PDSs, securities lending policies, and transactional or tax timeframes or processes; o liquidity events that occur that are inconsistent with the broader market; o any risk and compliance issues such as evidence of poor corporate governance; · Sudden unexpected growth or reduction in membership or unusual movement of members’ funds between investment options; · Relevant changes or proposed changes within the RSE or to the Trustee’s business operations; · Changes to or within a relevant Service Provider or investment manager’s business operations, such as ownership, key personnel, counterparty arrangements, systems and legacy system issues; · Legislative amendments that may impact on the investment strategy, such as changes to
1 The Trustee must disclose the investment strategy of the Product Provider in relevant member disclosure material.
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retirement income standards or tax arrangements; and · Any other circumstances that may potentially have a significant impact on the ability to achieve the investment objectives of the respective investment option(s).
JANA (for directly managed options) and ThreeSixty (for externally managed options) provide the Board or relevant Investment Committee (as appropriate) for their consideration a summary explanation of the outcomes of any investment strategy review including any recommendations (with relevant analysis) to amend an investment strategy or objective supported by sufficient justification for the amendment. Any assessment of whether the investment strategy of a MySuper investment option remains appropriate for members must be conducted in accordance with Appendix 3.
11. Investment selection For the purpose of the Trustee’s approach to investment governance, the investment selection process refers to: · for directly managed investment options, the processes and criteria for selecting each investment to give effect to the investment strategy; and · for externally managed and single security investment options, the processes and criteria for determining the suitability of an investment for inclusion on the investment menu of an RSE product(s). At a minimum, the Trustee has regard to the investment covenants contained in section 52(6) of the SIS Act when considering the appropriateness of an investment option. When making a recommendation, ThreeSixty, NSL or JANA provides the Trustee with the basis for their recommendation and the key issues and implications for members that should be considered in making a decision, in accordance with the requirements of this Policy. Before approving an investment option, the Trustee must be satisfied that: · it has a sufficient knowledge and understanding of the investment option, including an assessment of any factors that could have a material impact on the achievement of the investment objectives of the investment option; · it has sufficient understanding of how the investment option is expected to perform under the range of stress scenarios; · the investment option is appropriate for inclusion in the investment menu of the respective RSE product; and · effective due diligence has been completed, that is commensurate with the nature and characteristics of the investment option. 11.1 Portfolio Construction approach Portfolio construction is a crucial step in the process of investment strategy formulation in order to achieve the stated investment objectives. A well-constructed and maintained portfolio allows the Trustee to maximise its return objective for members based on a given level of risk as determined by its risk objective. Constructing a portfolio generally requires a systematic approach to determine an appropriate asset allocation across various asset classes.
The Trustee acknowledges that there are a number of different asset allocation techniques and approaches that may be adopted in formulating an investment strategy. For Directly Managed Options, the ‘Investment Futures Framework’ used by the NSL Capital Markets Research team supports the Horizon, Index Plus and Inflation Plus suite of products/investment options and the ‘Valuation, Fundamentals, Sentiment approach’ used by the NSL Institutional Portfolio Management team supports the suite of Plum investment options. Different investment approaches are designed to enable the Trustee to provide a number of Diversified Investment Options that meet a wider range of member needs. Portfolio construction should ensure the Trustee’s obligations to work in members best interests is paramount and contributes to sustainable and commercially viable superannuation offers to members.
Where Tactical Asset Allocation (‘TAA’) is employed, the Trustee expects its Portfolio Manager to demonstrate clearly the differences between dynamic and short-term TAA where both are used.
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Where model driven recommendations are used to determine the asset allocation of directly managed investment options, the Trustee would expect that the underlying methodology and assumptions are, and remain suitable with particular consideration be paid to the modelling of unlisted or illiquid investments.
11.2 Criteria for all investment options
11.2.1 Regulatory criteria Regulatory criteria include how the Trustee will have regard to section 52(6) of the SIS Act in addition to other Superannuation Law. Risk and return The Trustee assesses how the investment option has performed against a benchmark or another appropriate performance reference and whether it can have confidence that the investment option can achieve its stated objective in future (e.g. meaningful performance history, consistency of performance, confidence in the underlying investments). The Trustee also considers the return objective in light of the type and amount of investment risks1 associated with the investment option (e.g. those related to the underlying assets, or the management process), and strategies in place for mitigating those risks. The risks are assessed in the context of: · whether they may impact upon the ability of the investment option to meet its stated performance and risk objectives within the present time period or in the future; · whether the return objective is commensurate with the risk taken; and · the impact which the risks would have upon the RSE as a whole and whether they are aligned with the Trustee’s risk appetite.
Where an investment objective is expressed in terms of aiming to achieve a particular return above inflation (eg: CPI +4%), the Trustee generally expects the probability of achieving this objective to be in the range of 60% to 70%. JANA is required to regularly test whether the probability of achieving the investment objective remains in this range, based on prevailing market conditions. Composition The Trustee considers, for an investment option that includes multiple asset classes, whether the asset allocation targets and ranges are appropriate to the stated investment objectives and the circumstances in which the asset allocation targets and ranges may be changed. The Trustee may also consider the quality of the underlying investments.
Currency Exposure (for Directly Managed Options only) In line with NULIS Investment philosophy, the Trustee recognises that currency exposure plays an important role in Investment selection. Investment in international assets exposes the Fund to currency risk that can impact the value of investments in the Fund. However, the Trustee recognises that foreign currency exposure can provide useful diversification qualities for portfolios and potentially enhance returns. As such, the Trustee believes that currency exposure should play an important role in the management of investment portfolios. However, the level and composition of currency exposure adopted by each investment option needs to be consistent with the investment objectives of the option and should not compromise the risk objective of the option in any way. In general, the Trustee would expect that currency exposure should not dominate the risk profile of an option, that the contribution to total portfolio risk is monitored closely to ensure consistency with the risk objectives, and that the total level of currency exposure lies within the asset allocations ranges specified for each option.
As the Trustee, NULIS determines for those portfolios which have a specified benchmark allocation a neutral expected level of currency risk for each option based on normal market conditions. Any positions away from this neutral point [but not to a point that dominates the risk objective of the
1 Investment risks refer to the chance of loss on an investment, of achieving a return that is less than expected or insufficient to meet liabilities, or underperforming an index or benchmark.
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Diversification For the purposes of reducing investment risk and volatility, all multi asset / multi sector investment options should be well-diversified as appropriate across counterparties, geographic regions and investment styles, and take into account other factors such as liquidity, credit or macro-economic risks where relevant.1 Where the Trustee has determined that it is appropriate for a managed investment option to be invested in a single asset class, it ensures that there is an appropriate level of diversification within the particular asset class.
Liquidity and liabilities Liquidity of investment options should be sufficient to meet day-to-day expenses, payments and liabilities, such as fees, insurance premiums, redemption requests and pension payments during both normal and crisis conditions. For directly managed and externally managed investment options, consideration is given to whether the investment option is adequately diversified in order to limit exposure to any single event or market risk. The Trustee’s Risk Appetite Statement (‘RAS’) sets out the Trustee’s appetite for liquidity risk and the Trustee’s Liquidity Management Plan contains the roles and responsibilities for measuring and managing liquidity on an ongoing basis.
Valuation The Trustee considers the availability of reliable valuation information when approving an investment option. In doing so it may consider: · the type of asset and asset classes; · the investment structure (e.g. direct, fund of funds or pooled vehicle); · the sources of valuation, including the reliability, transparency, independence, timeliness and frequency of valuations; · the robustness and limitations of valuation methodologies (e.g. the use of models and assumptions in appraisal valuations); and · Consistency with the frequency of determining the value of members’ entitlements.
Taxation The Trustee must have regard to the expected tax consequences for the particular investment option and the RSE as a whole including appropriate tax reduction strategies that could be passed onto members.
Costs and fees The Trustee must consider the costs that might be incurred in relation to the investment option including the cost effectiveness of implementation (including both fixed costs of an investment option and costs incurred relative to returns). The fees that may be relevant to the investment option include Management Expense Ratio, rebates offered by the manager, performance fees (including calculation method), buy/sell spreads, commissions, withdrawal/exit fees and any other fees and costs. The appropriateness of these fees must be assessed in light of the nature of the investment option and against the pricing of other similar investment options including whether it is competitive relative to investment process / strategy / market conditions/ track record/ peer universe.2 The Trustee has regard to the impact which performance-based fees can have on the overall return of the investment option. Given that performance-based fees can vary depending on the type of investment option, when assessing the reasonableness of these fees, the Trustee considers:
1 For this purpose, consideration should be given to how sources of returns are expected to interact, the variability in these interactions and the impact of these interactions in different market conditions. 2 For externally managed investment options the Trustee expects that consideration of costs and tax consequences would form par t of the due diligence process when selecting the underlying collective managed investment.
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· how the performance-based fees impact on the return objective of the investment strategy; · how various market cycles may impact on the performance-based fees; and · whether the expected performance of the investment option and the level of the performance fee charged is aligned with members’ interests.
To satisfy the requirements above, the following guidelines outline how the performance fee structures of new investment options or underlying investment managers of an investment option will be assessed: · the amount of the base management fee of the investment option or underlying investment manager with a performance fee compared to similar investment options or managers that do not have a performance fee; · whether the performance fee hurdle is associated with the investment strategy of the investment option or investment manager. Considerations will include whether the investment option or investment manager has a benchmark plus hurdle (including management costs) that is linked to the investment objective; · the performance fee of the investment option or underlying manager relative to other similar investment options (calculated net of fees and taxes); and · a performance fee crystallisation period in line with the investment objective and assessment of the following features, if applicable: o high water marks, o caps on the maximum performance fee charged, and o resetting mechanisms.
Stress testing The Trustee expects all directly managed investment options and investment option categories will be subjected to stress testing (refer to section 14.4 for details). The results of that stress testing is made available to the Trustee and considered as part of the investment selection process. Stress testing is undertaken to confirm that the strategy is appropriate prior to implementation of an investment option and periodically thereafter.
Conflicts of interest When conducting due diligence for each investment option or investment manager, the Trustee gives due consideration to any potential or actual conflicts of interest or duty that may be present or may arise, and what measures could be implemented to effectively avoid, manage or disclose the conflict in accordance with the Trustee’s Conflicts Management Policy. Taking into consideration these conflicts of interest obligations, the Trustee must be satisfied that all analysis has been completed on an ‘arm’s length’ basis and that related party products have been assessed in the same way as any externally manufactured investment product.
Specifically, the Trustee ensures the following matters are satisfied before approving any related party investment product: · The quality of management of the investment product is comparable or superior to products offered by another Product Provider1; · The level of fees and associated costs are acceptable in reference to comparable non-related party investment products with regard to the investment approach, style and performance, and · The information supporting the selection criteria is factual and is taken from a variety of reliable sources including publicly available material, proprietary research and an external data provider (e.g. MorningStar).
Borrowing The Trustee is only permitted to borrow (or maintain a borrowing), or create charges over RSE assets in
1 This may involve the use of external research providers to determine a consensus research opinion.
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11.2.2 Administrative considerations The Trustee assesses whether the investment option can be effectively administered, including items such as: · Transaction frequency and timeliness and, where applicable, the length of time the offer is open; · Whether members may be treated inequitably, for example due to the application of withdrawal / exit fees, or inequitable construction of performance fees; · The complexity of the tax treatment of the investment option and whether it can easily be administered; · Timeliness of pricing, distributions, tax statements etc; · Availability, timeliness and frequency of unit prices, distribution information etc; and · Whether the investment option can be managed on the relevant technology systems.
11.3 Additional criteria for directly and externally managed investment options Product considerations The Trustee considers whether the proposed investment option is suitable for the respective product(s) of the RSE. Factors that may be considered include: · the benefit structure of the product(s) (i.e. defined benefit, accumulation, pension or hybrid); · the ability for the Trustee to meet benefit payments, rollover or transfer requests, intra-fund investment switching requests from members, and pension payments in accordance with the requirements of the SIS Regulations and the governing rules of the RSE1 · the targeted market segment and/or profile of members such as: o level of engagement with their superannuation investment; o whether they have a financial adviser; o level of risk tolerance; o whether they are seeking an income generating or capital growth investment option, or both; or o whether they are seeking a particular investment style or approach etc · if assets of a defined benefit fund:
o the benefit design, solvency position, relationship with the employer sponsor, the probability of continued employer support and the general economic climate; o assumptions about contribution levels, salary growth and investment earnings used in the actuarial projections; and o whether actuarial advice in regard to the suitability of the investment strategy is needed outside the regular 3 yearly review. · the financial state of the RSE (e.g. its size, stability and growth rate in terms of membership and assets under management); and · any relevant findings regarding the circumstances of the RSE in reports obtained from experts or advisers.
FUM and flows
1 The Trustee must consider its regulatory obligations, such as complying with minimum pension payment obligations or with the SIS Regulation 6.34 portability rules requiring payment of rollover or transfer requests from Members within 30 calendar days of the request date.
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The Trustee considers the following factors relating to the funds under management (‘FUM’) and inflows and outflows of any new investment option: · whether there is sufficient capacity to allow members to invest in the investment option without limiting the investment manager’s ability to execute their investment strategy; · whether there is sufficient FUM in the asset pool to ensure the strategy is sustainable; and · whether the expected future inflows are reasonable for the investment strategy. The Trustee will generally require any new investment option to have a minimum FUM of $10m within an underlying pool before members are able to invest. Investment options may be approved by the Trustee subject to this condition being met prior to being offered to members.
Derivatives usage The Trustee’s Derivatives Policy permits Derivatives to be used for the purposes of: · hedging; · efficient portfolio management; and · investment return generation aligned with investment objectives.
The Trustee considers whether the use of Derivatives is appropriate in view of the risks associated with the Derivative instruments (e.g. liquidity risk, basis risk, rollover risk and counterparty risk). In general, the Trustee has a greater tolerance for Derivative exposure where it is used for the purpose of risk mitigation in contrast to Derivative use for speculative or investment exploitation purposes. In any case, consideration is given to whether the intended usage of Derivatives is appropriate for the investment objective and strategy, and is consistent with the Trustee’s Derivatives Policy.
11.4 Additional criteria for cash investment options and cash holding account The Trustee may determine that the investment strategy of a directly managed investment option (MLCSF) or the cash holding account (MLCSNF, DPM and PC) will include deposit accounts with one or more ADI.
The Trustee acknowledges that for the financial benefit of members, where a directly managed cash investment option provided for the choice of members and the cash holding account includes deposit accounts held with an ADI, these should consist of Stable Retail Deposits where possible. The Trustee shall have regard to the differential in return for Stable Retail Deposits as compared to Intermediated Deposits and ensure there is adequate benefit for the Trustee committing not to replace the ADI for at least 12 months, determined by reference to a “synthetic indicator rate” using a combination of yields on senior bank debt and Credit Default Swap pricing that derives an interest rate that reflects the credit and liquidity risk.
If the Trustee determines that the strategy shall include Stable Retail Deposits, the following criteria apply: · The structure of deposit accounts for the directly managed investment option or cash account must meet the minimum requirements to maintain the higher rate available for Stable Retail Deposits; · The investment option can be made available to superannuation members only, it cannot be used for the management of plan reserves; · To satisfy the Trustee’s risk appetite settings, primarily the dimensions of investment risk, operational risk and strategic positioning risk, the ADI(s) selected will be a Major Australian Bank and NSL (MLCSF only) and the Superannuation Business Services Provider (MLCSF, MLCSNF, DPM and PC) will be required to consider each dimension when recommending the appropriate ADI; · The return shall be set in advance as a defined margin relative to the Reserve Bank of Australia Official Cash Rate (RBA OCR), and measured against the agreed return.
11.5 Additional criteria for externally managed investment options Investment quality In general, the Trustee expects any recommendation to add an externally managed investment option to the investment menu of an RSE product to be supported by at least one current ‘positive’ external
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Complexity Framework The Trustee expects that new externally managed investment options recommended by ThreeSixty will be assessed in accordance with the Complexity Framework as shown in Part C Appendix 2. This framework recognises that a greater level of research, assessment and due diligence is warranted for high complexity investment options which have specific nuances. Accordingly, the framework categorises whether an investment option sub-category is ‘low complexity’ or ‘high complexity’.
Currency hedging Where the currency hedging is applied passively, and an unhedged currency version of an investment option is approved for inclusion on an RSE product investment menu, the hedged version is deemed to also be approved (or vice versa). ThreeSixty must notify the Trustee via the monitoring process (see Part B Section 14) where an investment option has been added to an investment menu in reliance of this approval process.
Hybrid property For investment options in the Property – Hybrid sub-category, further consideration will be given to liquidity management, valuation policies and gearing levels.
Hedge funds Further consideration is given to the following factors for investment options classified as hedge funds: · Liquidity management; · Transparency of structure; · Low correlation to equity and broad indices; · Use of leverage; · Underlying fee structure; · Use of offshore entities; · Derivatives usage; · Short selling; · Gearing; and · Prime Broker / securities lending.
Responsible Investment options (Including Ethical/Socially Responsible Investments/ESG options) Responsible Investment options1 are assessed based on those factors that are considered in regards to the review of any investment manager as listed in Section 12. Responsible investment options are further classified as ‘Light’, ‘Moderate’, or ‘Substantial’ depending on degree of responsible investment integration into the investment philosophy and process.
Disclosure For certain externally managed options within MLCSNF, DPM and PC, members must be provided access to a copy of the PDS issued by the Product Provider of the investment option. The Trustee must be satisfied that to the best of its knowledge and belief, the PDS: · Fully discloses all relevant information and to the best of the Trustee’s knowledge is not misleading or deceptive; · Is not unduly complex and suitable for members; and
1 Responsible investment (RI) refers to methodical incorpor ation of ESG (Environment, Social & Governance) into the investment philosophy to ensure long term sustainability of investment markets.
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· Can be made available for members.
11.6 Additional criteria for single security investment options ASX listed securities Only MLCSNF, DPM and PC offer members direct access to ASX Listed securities1. The following general criteria apply (applicable to all ASX listed investment options): 1. Any investment option added to the RSE must be administrable by the Superannuation Business Services Provider. 2. Unless it indicates otherwise, the Trustee will rely upon its delegation to ThreeSixty for the review and approval of any ASX listed securities in accordance with the below criteria:
Type of security Sub-type Approval and monitoring criteria
Ordinary Listed ASX All Ordinaries and Shares which form part of the ASX All Ordinaries Index are approved. The All Securities their Options. Ordinaries represents the Top 500 shares on the ASX, though the exact number of shares in the index is not necessarily always equal to 500. The shares menu will be rebalanced at intervals to be determined by the Superannuation Business Services Provider , but at a minimum, annually.
Initial Public Offers (IPO) If the fully subscribed offer is forecast to achieve a market capitalisation and other new listings2 sufficient to be included in ASX All Ordinaries Index, as stipulated in the Prospectus, the IPO is approved.
Listed Interest Rate Not applicable Approval may be granted if the LIRS meets either of the following criteria: Securities (‘LIRS’) Credit rating: LIRS with a credit rating must have at least a BBB+ rating from a recognised credit rating agency (e.g. S&P, Moody’s or Fitch) at time of inclusion, and a credit rating of at least BBB- for ongoing approval. Issuer: the Issuer (or parent company if the Issuer is a subsidiary) of the LIRS is among the top 300 companies by market capitalisation on the ASX.
Listed Managed Listed Investment To be considered by Trustee, on a case-by-case basis. Investments (‘LMIs’) Company (‘LICs’)
Exchange Traded Funds To be considered by Trustee, on a case-by-case basis. (ETF), Commodities (ETC) and Notes (ETN). Instalment warrants Not applicable To be considered by Trustee, on a case-by-case basis.
Direct fixed interest Direct fixed interest investment options consist of bank deposit products. These bank products include at call and fixed term deposits. The interest rate can be fixed or linked to an external variable, e.g. inflation rate, index. Direct fixed interest investment options are simple, transparent and reasonably predictable. For the consideration of any new direct fixed interest investment options, the following criteria apply: · Minimum BBB+ credit rating when added, · Administration and tax requirements can be met, · Member demand, · Minimum BBB- credit rating for ongoing inclusion, and · Due to the nature of the investment, Direct Fixed Interest investment options are exempt from the 30 day liquidity restriction provided that this is appropriately disclosed to members.
For initial inclusion, the Trustee considers each issuer’s Direct Fixed Interest product on a case-by-case basis. Subsequent offers by an approved Direct Fixed Interest product, e.g. introduction of a NAB Term Deposit with a different term, do not require the Trustee’s approval where the issuer has a credit rating of BBB- or better.
1 The product offering of MLCSNF, DPM and PC is specifically catered to members who, with the aid of their financial adviser, are seeking access to a broader set of investment options to construct their investment portfolio. 2 “Other new listings” include shares created by the demerger of a company into two or more companies, or similar corporate actions where new shares are created. For all intents and purposes, such corporate actions will be treated the same as IPOs.
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Fixed Rate Funds Fixed Rate Funds offered within MLCSF are investment options where the member invests an amount for a fixed term (currently one, two or three years) and in exchange receives an agreed rate of interest and their original investment back at the end of that fixed term. Fixed rate funds are reviewed as part of the fixed income category reviews.
Unlisted investments Generally the Trustee will not offer illiquid unlisted investments other than term deposits (e.g. direct property assets, real estate investment trusts) as stand-alone options to members due to the high risk factors associated with these assets (including liquidity constraints and the complexities that underpin the valuations of these assets). However, the trustee may invest in illiquid assets as a component of an investment option where the investment option as a whole has an appropriate liquidity profile.
12. Investment manager assessment Where NSL on behalf of the Trustee, is considering the suitability of an investment manager for a directly managed investment option, or the Trustee is considering the integrity and suitability of the investment manager of an externally managed investment option, it may consider factors such as: · their investment strategy, philosophy and approach to investment portfolio composition; · their approach to managing investments, including the management of market and investment risk factors; · the features and any potential shortcomings of any relevant investment products; · the approach, quality and extent of research, due diligence and investment processes and controls used; · the expertise of key investment staff; · previous performance record and expected future performance as determined by both risk and return measures through various market cycles; · the approach, quality and timeliness of the investment valuation, monitoring and reporting process, including downstream investments; · approach to liquidity management; · the adequacy of systems, policies and processes in place to monitor and manage operational risk exposures; · quality and sustainability of the business model including adequacy of processes and monitoring controls, dependency upon key staff, framework for decision making and level of funds under management; · quality of investment reporting; · the cost of services provided comparable to other quality investment managers; and · if any potential, actual or perceived conflicts of interest exist, and whether adequate measures can be implemented to effectively avoid, manage or disclose the conflict in accordance with the Trustee’s Conflicts Management Policy. When assessing the suitability of an investment manager, the Trustee (or NSL on the Trustee’s behalf) may rely upon the views of ThreeSixty, JANA or external research houses in relation to the above matters where it is satisfied that adequate due diligence has been performed.
13. Valuation of investment options The Trustee outlines its requirements in relation to valuation in its Asset Valuation and Unit Pricing Policy.
14. Investment monitoring
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The Trustee monitors and assesses regularly whether the investment objectives of each investment option are being met so that the Trustee can take appropriate and timely action, where required, to protect the financial interests of members. For this purpose, the Trustee has developed quantitative and qualitative tests as outlined in this section, to monitor the performance of each investment option against established risk and return measures on an ongoing basis. Where the investment option fails the quantitative or qualitative tests, a more detailed review may be required to determine if the investment option remains appropriate for members. This may include an assessment of the same criteria applied as part of the investment selection process. This section of the Policy outlines the process, performance benchmarks1 and investment criteria by which the investment options are to be monitored. Persons responsible for applying and assessing the performance measures must be operationally independent from persons who are responsible for making the investment decisions.2 A different investment monitoring process is in place for each investment option type; for: · Directly managed options: o Reporting on investment performance is provided by JANA. o Reporting on portfolio management activities is provided by NSL. o The assessment of performance for the MLCSF is also carried out by the MPIC on behalf of the Board. · Externally managed options: o Reporting on performance is provided by ThreeSixty based on performance data sourced from independent sources (eg: Morningstar) and typically include the use of research ratings as provided by independent external parties (Lonsec, Zenith etc.). o The assessment of performance for MLCSNF, MLCPST, DPM and PC is carried out by the SWIIC on behalf of the Board. · Single security investment options: o ASX Listed securities (excluding ETFS) and Direct Fixed Interest Investment options are monitored by ThreeSixty in accordance with the criteria set out in Section 11 of Part B. ThreeSixty has delegated authority as outlined in section 14.3.
The Trustee’s RAS sets out the Trustee’s appetite for liquidity risk. In addition to the processes outlined below, liquidity for each RSE is reviewed against the Trustee’s liquidity tolerance levels as set out in the Trustee’s RAS each quarter, the outcomes of which are reported in the Trustee’s quarterly Risk Report.
14.1 Investment Monitoring - Directly managed investment options All directly managed options within MLCSF are subject to ongoing monitoring by JANA with quarterly reporting to MPIC, or more frequently if required.
14.1.1 Quarterly Monitoring and Reporting – Directly Managed Options Quarterly monitoring reporting for directly managed options must address the following areas: Performance and attribution Quantitative data for each option must be provided in a form acceptable to the MasterKey and Plum Investment Committee. This must include returns over 3 month, 1, 3 and 5 year periods compared to at least one of the following: · Investment objective (on a net of investment fees basis if investment objective is expressed to be net of investment fees); or · Benchmark indices (typically on a gross of investment fees basis), or · Peers using an industry recognised survey (typically on a net of investment fees basis) Reporting is to include commentary or data showing attribution of returns between asset classes or
1 The performance benchmarks must be objective and measurable and exhibit characteristics that are consistent with those of the investment or the investment manager being measured. 2 SPS530 paragraph 25.
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Commercial in Confidence Investment Governance Policy relevant portfolio construction strategies for significant (high FUM or member number) options. Capital market insights and asset allocation views Commentary on developments in global and domestic capital markets and the impact of these on portfolios. Liquidity Analysis Liquidity monitoring measures are set out in the Liquidity Management Plan. JANA provides commentary on liquidity on a quarterly basis. Liquidity testing using the Tiered Liquidity Test is conducted on an annual basis as part of the Investment Review for the Trustee, or in the event of any significant changes. Derivative usage NSL reviews and provides quarterly reporting on the Trustee’s Derivative exposures, together with details regarding any mandate breaches. In accordance with the NULIS Derivatives Policy, all breaches (including breaches of exposure limits) are considered events and are to be assessed, managed and escalated in accordance with the Events Management Framework, without exception. There is no breach threshold applied in the NULIS Derivatives Policy. For reporting purposes, a materiality threshold is applied where breaches which have a greater than 1 bps impact at the investment mandate level will be reported to the MPIC. Portfolio Changes NSL identifies any significant changes to portfolio construction (eg: asset allocation changes or changes in passive:active allocations) or investment manager changes, made within the scope of NSL’ delegated authority under the ICPM Deed.
Daily Monitoring – Asset Exposure Rebalancing (Directly Managed) Rebalancing of directly managed investment options will normally occur when the asset allocation moves beyond a +/- 3% rebalancing range around neutral asset allocations1. When a deviation greater than +/- 3% occurs, the asset allocation is restored halfway back to neutral asset allocation. This methodology has been determined by NSL to result in the most efficient management of asset allocation over time and allows the portfolio to optimise for trending markets (e.g. if a market is falling, rebalancing halfway increases the exposure as the market falls, but since markets often continue to fall even lower, necessitating subsequent rebalances, the further purchase of exposure happens at a lower price and vice versa with rising markets). The efficient allocation of cash flows means that the +/- 3% rebalancing ranges will rarely be exceeded. The Trustee monitors rebalancing activity to ensure that these ranges are being observed on a quarterly basis.
Conflicts of Interest JANA and NSL will each confirm that it has complied with the Trustee’s Conflicts Management Policy. NSL identifies whether there are any significant changes in allocation to related party investment managers or related party product providers. Other issues JANA and NSL will identify any other matters that should be brought to the attention of the MPIC. This includes matters related to investment risk and the results of stress testing where a trigger event has occurred.
14.1.2 Annual Review – Directly Managed Options In addition to the quarterly reporting, JANA conducts a comprehensive annual review which is reviewed by the MPIC covering:
Risk/return objective An assessment of the continued appropriateness of the investment objectives of directly managed investment options in consideration of performance indicators, changes in circumstances (e.g. member demographic profile) and revised forecasts (e.g. performance prospects of a particular asset sector). Any recommendation to the Trustee to change an investment strategy must be supported by sufficient analysis
1 The rebalancing range can be changed by NSL and as notified to the Trustee.
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Risk Analysis Options are tested against a range of stress scenarios and risk factors. This assessment considers if the level of risk continues to be appropriate, given how much risk would be required to achieve the performance objective. Further information in relation to stress testing is contained in section 14.4.
Investment strategy An assessment of whether the investment strategy is appropriate to meet the investment objectives is made.
Liquidity JANA conducts liquidity testing using the Tiered liquidity Test on an annual basis as part of the Investment Review for the Trustee to assess whether options are meeting the Liquidity measure as covered in the Risk Appetite Statement.
14.1.3 Interim Review Triggers In addition to the annual reviews, interim reviews of the investment strategy is carried out where the ongoing monitoring process identifies issues of significant concern that would warrant a full review of the investment strategy of an option. Trigger events are outlined in section 10.2.
Any recommendation to the Trustee to change an investment strategy must be supported by sufficient analysis and justification. Changes to the investment strategy will be made where it is considered that the investment strategy no longer adequately supports the investment objective (for example, the investment risk to achieve the stated return objective now exceeds the stated risk objective).
14.1.4 Closed products (MLC Super Fund only) The Trustee maintains a number of closed products which have a capital guarantee. These include traditional and non-traditional products which comprise the following arrangements: · Interest rate declared annually; · Whole of life and endowment policies which receive returns paid via bonuses; and · Immediate annuities. The Trustee ensures that the underlying issuing entity makes good on any capital guaranteed rate of return, or where an annual interest rate or bonus is offered, that the rate is competitive. For this purpose the Superannuation Business Services Provider reports on the declared rate of interest and details of any bonus payments.
14.1.5 Wrap Cash Account The GM, Retail Super & Investments will monitor the competitiveness of the Cash Account and provide a report to the Super Wrap & IDPS Investment Committee (SWIIC) on at least an annual basis. A report will also be provided by the GM, Retail Super & Investments at any other time if requested by the SWIIC or the Board. Subject to the terms outlined in the table in Appendix 7, delegate authority is provided to the GM, Retail Super & Investments to approve the on-going re-negotiations of the agreement with NAB to retain cash account holdings in the NAB Professional Funds Account.
14.1.6 Additional monitoring required for the Cash Investment Option(s) and Cash Holding account1. Directly managed options within MLCSF and the cash holding account within MLCSNF, DPM and PC that invest in Stable Retail Deposits are subject to ongoing monitoring by the Superannuation Business Services Provider as they require consideration of operational and strategic positioning implications in addition to performance / interest rate. When conducting its monitoring and providing reports to the Trustee, the
1 The Cash Holding Account is the account required to be held by every member within MLCSNF, DPM and PC to facilitate investment transactions.
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Superannuation Business Services Provider shall confirm that it has complied with the Trustee’s Conflicts Management Policy.
For directly managed options within MLCSF, the Trustee shall consider reporting and recommendations provided by the Superannuation Business Services Provider in addition to other reporting provided by JANA, while for MLCSNF, DPM and PC, reporting and recommendations of the Superannuation Business Services Provider shall be the sole reference for the Trustee.
The monitoring of investments in Stable Retail Deposits shall consist of the Superannuation Business Services Provider being responsible for: · Ongoing and Quarterly Monitoring (including quarterly reporting to the Investment Committee): lead market indicators including changes to retail deposit rates, yields and premiums on the major bank issued instruments (bonds, Floating Rate Notes, etc), rates for competitor cash “deposit- like” investment options along with any other information on ADI activity that may become available, will be monitored and changes shall act as triggers to initiate rate discussions and potential negotiation with the investment manager or ADI. · Annual review: a comprehensive annual review will be undertaken to include available market information for superannuation cash investment option returns for members and other information available only on an annual basis. Additionally, the Superannuation Business Services Provider will calculate (or arrange to be calculated by an independent third party) a “synthetic indicator rate” using a combination of yields on senior bank debt and Credit Default Swap pricing to derive interest rates that reflect credit and liquidity risk, with consideration given to the 12 month commitment The synthetic indicator rate will be calculated for each month for the prior 12 month period and together with the other indicators shall form the basis to determine trend, such that if an upward trend is identified, renegotiation will be sought by the Superannuation Business Services Provider with the incumbent ADI on behalf of the Trustee. · Three yearly review: every third annual review will include an enquiry by an independent third party of the potential rates available from other Tier 1 ADIs for similar Stable Retail Deposit arrangements, which will be conducted on a “no names” basis.
The MasterKey and Plum Investment Committee shall be provided with monitoring reports from the Superannuation Business Services Provider that include the analysis, indicator rates and proposed or completed actions where rate negotiations have been or are planned to be undertaken. Due to the complexity and risk to deposit rates for members, where any of the indicators identify that a higher rate may be available negotiations will be undertaken with the incumbent ADI first, and only if an appropriate rate (in consideration of the operational and strategic positioning risks) is not achieved, the Trustee shall initiate a tender (or seek the investment manager for directly managed investment options) to identify an alternate ADI.
14.2 Investment monitoring - Externally managed investment options MLCSF offers a small range of (externally) managed funds. MLCSNF, MLCPST, DPM and PC offer a comprehensive range of managed funds, a range of separately managed accounts and Listed Investment Companies. Further asset types may be added with approval of the Trustee. ThreeSixty monitors the quantitative and qualitative aspects of each investment option, as outlined below, and provide key summary information in quarterly monitoring reporting, including any recommendations to and decisions requested of the Trustee.
ThreeSixty reports to the MPIC in relation to options within MLC Super Fund and the SWIIC in relation to options within MLCSNF, MLCPST, DPM and PC.
14.2.1 Quarterly monitoring Quantitative - return / risk objectives The Trustee considers quantitative measures for performance and risk to be key components of the investment monitoring function. These measures are used as a trigger to determine if more detailed qualitative monitoring of particular investment options is required. This process leads to an exception based reporting model, with only those investment options failing to meet the requirements of this Policy being reported to the Trustee for review. All open and closed options are subject to this exception-based reporting model.
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Return In monitoring the performance of managed investments, ThreeSixty applies an appropriate quantitative test to three broad fund types. Investment options that fail this test will be assessed and reported as an exception to the Trustee (with recommended action to be considered). Where an investment option fails the monitoring review, the investment option must be placed on ‘On Watch’. The Product Provider may be sent a Show Just Cause letter seeking a written explanation of the underperformance where it cannot be adequately explained by ThreeSixty. A summary of the performance monitoring tests is outlined in the following table:
Step Monitoring test Mainstream options Passive options (index Absolute return options (benchmark aware) aware) - includes ETFs (return/risk objective - benchmark unaware) MLC PST, MLCSNF, DPM and PC Consistently 4th quartile – over If fail (ie: if performance is 1, 3 & 5 years consistently 4th quartile for 1 MLC PST, MLCSNF, DPM and n/a n/a MLCSF1 PC or 3rd quartile for Consistently 3rd quartile – over MLCSF), proceed to Step 2 1, 3 & 5 years Deviation from benchmark - 2 outside of tolerance over 1, 3 & If fail, proceed to ‘Show If fail, proceed to ‘Show n/a Just Cause’ letter Just Cause’ letter 5 years Deviation from return objective 3 - outside of tolerance over n/a n/a If fail, proceed to ‘Show Just Cause’ letter stated investment timeframe
· Mainstream options: Consistent fourth quartile performance against Morningstar peers over one, three and five years will trigger an assessment against the fund’s benchmark to determine if any deviation is within acceptable limits. · Passive options: The performance of these funds will be assessed against an acceptable deviation (tracking error) from their respective index. · Absolute return options: These funds are assessed to determine if any deviation from the stated investment objective is acceptable. Risk Quantitative risk monitoring is conducted in relation to the investment option’s risk objective. This may include an assessment of any relevant risk indicator such as asset allocation, standard deviation, the standard risk measure, tracking error, information ratio or Sharpe Ratio. This assessment must consider if the level of risk continues to be appropriate, given how much risk would be required to achieve the performance objective, and if it is appropriate to that investment option category.
Sub-category specific criteria Mortgage funds have the following additional criteria to be monitored:
Key performance indicators Decision point
Liquidity Minimum of 10% in cash Leverage Maximum leverage of 66.67% Percentage of fund size owned by Monitored to ensure that the Trustee does not own more than 25% of the the Trustee investment option in total across their RSE. Arrears greater than 90 days as Maximum of 1% arrears percentage of fund size The RSE’s exposure to direct / unlisted development properties must be Development exposure considered to avoid excessive exposure to such assets.
The Investment Committees may invite investment managers to present to it directly from time to time.
1 3rd Quartile test being implemented as requested at the November 2016 MPIC Meeting.
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14.2.2 Annual ‘deep dive’ sub-category reviews All options are subject to a thorough review by ThreeSixty with reporting to and consideration by the Investment Committees. This is not on an exceptions basis and must include a review of the investment strategy of each option against its investment objectives and consideration of any relevant criteria outlined in the investment selection process (see Part B Section 11). Options are to be reviewed according to a schedule agreed with the SWIIC or as required by developments in the external environment (ensuring each option is reviewed on at least an annual basis).
14.2.3 Interim Review Triggers In addition to the annual reviews, interim reviews of the investment strategy are carried out where the ongoing monitoring process identifies issues of significant concern that would warrant a full review of the investment strategy of an option. The Trustee expects that a thorough interim review of the investment option would be triggered where there is a failure in the quantitative monitoring tests outlined above or one of the other trigger events listed in section 10.2 occurs.
14.2.4 Stress Testing To ensure the Trustee has sufficient understanding of how options will perform under stress scenarios, stress testing is conducted at least annually and reported on at the investment option category level as part of the sub-category review cycle. Further information in relation to stress testing is contained in section 14.4.
14.3 Investment Monitoring - Single security investment options
14.3.1 ASX Listed Securities ASX Listed securities (excluding ETFs) and Direct Fixed Interest investment options are monitored in accordance with the criteria set out in Part B Section 11. ThreeSixty has delegated authority to remove from the investment menu of MLCSNF, MLCPST, DPM and PC, any ASX listed securities that no longer meet the approval criteria.
14.3.2 Direct Fixed Interest Direct Fixed Interest investment options are monitored in accordance with the criteria set out in Part B Section 11. Investment options that cease to meet the specified criteria may no longer be offered to members. In its quarterly monitoring reports to the Investment Committees, ThreeSixty also monitors: · Whether the rates offered are competitive compared against similar issuer’s direct and platform rates; and · Whether the credit rating of the investment has degraded.
In terms of disclosure, rates are published on the Trustee (or its agent’s) website and made available to members prior to the member selecting this investment option.
Cash holding account (MLCSNF, DPM and PC only) Every member within MLCSNF, DPM, and PC is required to have a Cash Holding Account to facilitate their investment transactions. The Superannuation Business Services Provider performs monitoring to ensure that the interest rate given to members remains competitive and, at a minimum, an annual review of the Cash Holding Account is provided to the Trustee.
Stress Testing To ensure the Trustee has sufficient understanding of how single security investment options will perform under stress scenarios, stress testing will be conducted and reported on at the investment option category level as part of the sub-category review cycle. Further information in relation to stress testing is contained in section 14.4.
14.4 Stress Testing
14.4.1 Purpose of stress testing
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The Trustee regards stress testing as an integral part of its formal investment risk assessment in order to:
· identify risk factors based on a forward-looking assessment of markets, and formalise how these risks are monitored and reported; · measure the potential impact of risk factors on the likelihood of achieving investment objectives, or maintaining sufficient liquidity; · enhance understanding of the sensitivity of each investment option to a range of circumstances, with particular emphasis on uncertain tail risks; · establish risk mitigation strategies to bring these risks to an acceptable level; and · formalise how risks are monitored and reported.
14.4.2 Frequency of stress testing and trigger events Stress testing is carried out at least annually as part of investment strategy reviews. Stress testing is carried out prior to implementation of a new directly managed option, and an assessment of a fund manager’s stress testing process will also be carried out prior to implementation of a new externally managed investment option.
Trigger events for ad hoc stress testing are similar to conditions triggering ad hoc investment strategy reviews as summarised in section 10.2. Trigger events could include heightened market volatility, proposed changes to an investment strategy, changes to the risk profile of underlying investments, unexpected member movements or changes in regulation.
14.4.3 Roles and responsibilities The Trustee has delegated responsibility for carrying out stress testing and reporting to ThreeSixty and JANA. The Trustee and/or its Investment Committees approves the appropriate stress scenarios recommended by JANA annually and the methodology used to carry out stress tests prior to the stress testing being conducted. ThreeSixty will perform stress testing for all investment options (using the stress scenarios recommended by JANA) in MLCSNF, MLCPST, DPM and PC and for externally managed options in MLCSF. JANA will perform stress testing for all directly managed investment options in MLCSF. This is in addition to liquidity testing described in the Liquidity Management Plan.
14.4.3 Methodology Determining the scenario set A scenario set will be determined for stress testing taking into account a range of risk factors that can create extraordinary losses or make the control of risk in the investment strategy difficult. These factors include volatility, drawdown risk, sequencing risk, inflation risk, tail risk, correlation risk and liquidity risk.
The scenario set comprises a forward-looking assessment of risk over defined time horizons which can use either historical or hypothetical scenarios. Historical events can be useful if some aspects of the event could reasonably be expected to recur. Hypothetical scenarios are tailored constructions of low probability plausible future events that may comprise interactions between various risk factors.
In cases where an investment option is exposed primarily to a single source of risk, a sensitivity analysis can be carried out, for instance by varying the interest rate for a fixed interest investment.
Applying the scenario set to investment options ThreeSixty at a minimum, applies the scenario set at the investment option category level as defined in Appendix 1. JANA applies the scenario set at an option level -for directly managed investment options.
The analysis simulates the potential impact of each scenario over a defined time horizon, allowing the Trustee to assess:
· performance under adverse circumstances (e.g. ability to stay true to label, timeliness of rebalancing, changes to liquidity profile); · likelihood of meeting investment objectives;
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· ability to redeem assets during extreme market volatility; and · vulnerability to certain risk factors. Review Stress testing assumptions and the scenario set are reviewed at least annually as part of investment strategy reviews. In order to ensure that assumptions remain relevant and appropriate, any review takes into account the purpose of the stress testing exercise, the nature of the investment options undergoing testing, as well as any significant changes to the medium term investment outlook.
Reporting and triggers for escalation It is important for the Trustee to receive sufficient information to satisfy itself as to the extent and quality of the stress testing undertaken by assessing the range of scenarios applied and the methodology used. Reporting includes:
· descriptions of the various stress test scenarios and risk factors tested; · the assumptions underpinning the scenarios and methodology used; · stress test results plus commentary on conclusions drawn, including whether any tolerance limits were breached; · analysis of stress testing results against historical results to identify emerging trends; and · any recommended actions in the best financial interests of members, including possible changes to asset allocations or investment risk management arrangements, supported by sufficient justification and analysis. A key trigger for the escalation of stress testing outcomes is where the tests indicate risk has moved materially outside risk tolerance. The Trustee will be notified promptly in order to ensure timely action is taken to implement mitigation strategies to protect the financial interests of members.
14.5 Actions taken in response to monitoring ThreeSixty and JANA are required to report to the Trustee on the outcomes of investment monitoring (including stress testing). The report must include findings in relation to investment options which are not meeting investment quality expectations, are underperforming or which fail the stress test and recommendations regarding what actions may be in the best financial interests of members (including the reasons for its recommendation). JANA conducts the stress testing of implemented options through the annual Investment Strategy Review. In this review, JANA provides the modelling, liquidity and risk analysis results for each option. Along with the quantitative results JANA provides commentary on the options including any recommended actions for underperforming options or options that fail the stress or liquidity test. The Trustee must also be notified of incidents (e.g. an investment option becomes illiquid or an underlying investment is terminated) that may require the Trustee to take action. The Trustee may respond to the information it receives in reports by choosing to take steps to address under-performance, including but not limited to placing the investment option on the watch list, limiting member exposure to or terminating the investment option. In such circumstances, the Trustee may choose one of the courses of action described in the below table: Investment approval status table
Proposed Definition / action New Additional Transfer of rating members investment assets allowed? allowed? required?
Approved The investment option can remain on the relevant Yes Yes No
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Proposed Definition / action New Additional Transfer of rating members investment assets allowed? allowed? required?
investment menus and continue to be made available to new and existing members1.
Hold No investments are accepted from members who No Yes No do not currently have an existing holding in the (Trustee may investment option. Existing members may allow for an maintain the investment option and can continue implementati to make regular contributions and additional on period 0-6 investments. months)
Closed No investments are accepted from members who No No No do not currently hold that investment option. (Trustee may Existing members may maintain the investment allow for a option and can continue to make regular transitional contributions and additional investments for a implementation period set by the Trustee, at which time the period 0-6 investment option will be closed for any further months) regular contributions and additional investments, and the nearest equivalent investment option will be selected as a default alternative option for future cash flows.
Sell An investment option is closed as soon as No No Yes practicable for all future and additional (Trustee may
investment. The investment option must be allow for an terminated on a future date set by the Trustee implementation and benefits transferred to an alternative period 0-6 investment option. An alternative nearest months) equivalent investment option may be provided where required by the Trustee.
The Trustee may choose to continue to ‘Approve’ an investment option or place it on ‘Hold’ but due to concerns in certain areas, will monitor more closely via the Watch List. In conducting the monitoring activities outlined in this section, ThreeSixty may determine, on behalf of the Trustee, that it is prudent to take immediate action on the approval status of an externally managed investment option. In that situation, ThreeSixty has delegated authority to apply an immediate ‘Hold’ or ‘Closed’ rating based on due diligence, research, new information or events particular to that investment option. The implementation of that decision may be affected by operational constraints (e.g.: the time taken to reissue PDSs). Where this delegation has been exercised to apply a temporary ‘Hold’ rating, ThreeSixty may return the investment option to an ‘Approved’ status without prior approval by the Trustee. ThreeSixty’s decision to change the status of an investment option will be reported to the Office of the Trustee as soon as practicable and at the next scheduled meeting of the Investment Committee.
Transferring member balances to another investment option Where an investment option is given a ‘sell’ rating, the member balances within the investment option must be transferred to an alternative investment option. ThreeSixty or JANA must recommend to the Trustee for its approval, an alternate investment and provide justification for selecting that option in acting in the best financial interests of members. The alternate investment option would ideally be the nearest equivalent investment option which is determined on the basis of a broadly equivalent asset allocation and investment objective. However, the Trustee may decide, particularly for MLCSNF, MLCPST, DPM and PC, for member balances to be applied to a cash investment option or holding account. A transition plan will be developed, documented and recommended to the Trustee for managing the
1 An investment option which has previously had its approval status removed may subsequently be reinstated due to a change in circumstances which enables it to satisfy the Trustee’s investment criteria.
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Suspension of payments from investment options Circumstances may take place which necessitate a decision by the Trustee to suspend payments (rollovers, transfers, switches and lump sum benefit payments) from investment options which become illiquid. Subject to the following exceptions, the suspension of payments from the funds of members’ benefits backed by illiquid investments is to apply automatically upon the Trustee receiving notification of an underlying liquidity event. The following exceptions apply to the suspension of payments of benefits backed by illiquid investments: · Payments may be made to members whose benefits are backed by illiquid investments in circumstances of financial hardship. The payment of benefits in these circumstances will be assessed on a case by case basis by the Office of the Trustee, having regard to the impact on the remaining members of the Funds. · The Trustee Board may approve payments in other extraordinary circumstances, having regard to the impact on the remaining members of the Funds. Key aspects that the Trustee considers are: · The validity of the power being exercised by the investment provider causing the illiquid occurrence; · The Trustee’s statutory and trust law duties; · Any detrimental impact on members as a result of an occurrence causing an investment option to become illiquid; · Need to obtain APRA portability relief; and · Member disclosure requirements.
15. Member disclosure
Product Disclosure Statement Once a new investment option has been approved, it must be offered to members in the Trustee’s PDS or associated disclosure documents. Disclosure to members in relation to an investment option must be sufficient to enable them to make informed decisions. For this purpose, members may also be required to be provided with access to a copy of the PDS issued by the wholesale Product Provider of that investment option.
If an option is to be removed from an investment menu, it must be removed from the Trustee’s PDS.
Annual Reports The Trustee makes available information to members each yearly reporting period in relation to the management, financial condition and investment performance of the RSE and the investment options (‘Annual Report’). This includes, among other things, information in relation to: · the investment strategy of the RSE, · the investment objectives and asset allocations of each investment option, · the names of the respective investment managers, and
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· the use of derivative securities and, where required, the derivatives charge ratio1.
Significant event or material change communication The Trustee will notify members of any material changes (e.g. significant change of strategic asset allocation) or significant events (e.g. an investment option becomes illiquid) which may impact their superannuation benefit (referred to as a ‘SEN’). The SEN must include information that is reasonably necessary for the member to understand the nature and effect of the change or event2. In addition, where there is a material adverse change to an externally managed investment option in which members have a standing periodic investment instruction, the trustee must as soon as practicable either (1) stop further investment until the new PDS for the option is available and new client instructions are received; or (2) give affected members information about the change and an opportunity to change their instructions. 3 The trustee’s present general procedure is option 2.
Product Dashboard The Trustee will, if required by the Corporations Act, publish a product dashboard for each investment option on a publicly available website containing the information required to be disclosed by the Corporations Act.
Requirement to publish portfolio holdings The Trustee must if required by the Corporations Act, publish information regarding their portfolio holdings on a publicly available website as at 30 June and 31 December each year within 60 days after each reporting day.
16. Member specific investment matters 16.1 Member investment limits The Trustee offers a variety of single sector4 and/single security investment options to the members of its RSEs. In doing so, the Trustee is mindful that a high concentration in any one source of risk and/or return increases the likelihood that any adverse movement of the particular risk and/or return may have a material negative impact on the overall performance of the members’ portfolio. For this reason, the Trustee has established member investment limits for certain investment types to assist in ensuring that the investment portfolio of members is adequately diversified. The below investment limits are imposed on member’s portfolios in MLCSNF, PC and DPM and in MLCSF where stated. These investment limits have been developed with regard to the investment covenants of risk, composition and liquidity.
Investment type Investment limit
Hybrid property funds, · A maximum of 25% of a member’s portfolio can be invested in each of these hedge funds and categories. mortgage funds
Unlisted fixed interest · A maximum of 85% of a member’s accumulation or pension portfolio can be invested – annuities in this category.
1 The derivatives charge ratio is the percentage of the total assets of the RSE (by value) that the Trustee has mortgaged or charged as security for derivative investments made by the trustee. 2 The notification should generally be provided before the change occurs or as soon as practicable (and no more than three months after) the change or event takes place. However, if the Trustee believes that the change or event is not adverse to the member’s interests and the member would not be expected to be concerned about the delay in receiving the information, the notice may be given up to 12 months after the change or event occurs. 3 ASIC Instrument 2016/65 4 ‘Single sector option’ means an investment option which has investments in only one asset class.
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Investment type Investment limit
Ordinary listed · A maximum of 30% of a member’s portfolio can be invested in any individual security securities listed in the Top 50, at time of investment. (Top 50 as classified in last menu roll). · A maximum of 20% of a member’s portfolio can be invested in any individual security listed outside the Top 50 but in the Top 300, at time of investment. (Top 300 as classified in last menu roll). · A maximum of 10% of a member’s portfolio can be invested in any individual security listed outside the Top 300, at time of investment. · A maximum of 40% of a member’s portfolio can be invested in total in securities listed outside the Top 300, at time of investment.
Listed interest rate · The limits are based on the restriction applied to the parent company under the securities (‘LIRS’) Ordinary Listed Securities section above.
Instalment warrants · A maximum of 10% of a member’s portfolio can be invested in any one instalment warrant, at time of investment. · A maximum of 20% of a member’s portfolio can be invested in total, in instalment warrants, at time of investment.
Listed investment · No limits. The Trustee may impose restrictions on a case-by-case basis. companies (‘LICs’)
Exchange traded · A maximum of 10% of a member’s portfolio can be invested in any individual ETC, at commodities (‘ETCs’) time of investment. · A maximum of 20% of a member’s portfolio can be invested in total in ETCs, at time of investment.
Exchange traded funds · No limits. The Trustee may impose a limit of 10% for high complexity products on a (‘ETFs’) case-by-case basis.
Direct fixed interest Superannuation investments (including · A maximum of 80% of a member’s portfolio in MLCSF for all terms to maturity. term deposits) · No limits for other RSEs. The Trustee may impose restrictions, on a case-by-case basis. Pension · A maximum of 80% of a member’s portfolio in MLCSF for all terms to maturity. · A maximum of 80% of a member’s pension portfolio in the MLCSNF, PC and DPM can be invested in total in direct fixed interest investments that have terms greater than twelve months.
Fixed Interest: · A maximum of 25% of a member’s portfolio can be invested in total in Fixed interest Specialist Specialist Funds within MLCSNF, PC and DPM.
Fixed Rate Funds · A maximum of 80% of a member’s portfolio can be invested in total in Fixed Rate Funds. Fixed Income SMAs · A maximum of 50% is able to be held in Fixed Income SMAs.
High Growth – Real Return (Geared) sub- · A maximum of 50% of a member’s pension portfolio can be invested in total in High category Growth – Real Return (Geared) funds (no limit in accumulation phase).
Private Equity · Investment limit of 10% of a member’s portfolio can be invested in total in Private Category Equity Category.
Other managed · No limits. The Trustee may impose restrictions on a case-by-case basis. investment options
Application of the member investment limits The Trustee enforces the above member investment limits. Accordingly, members are not permitted to purchase or transfer an asset above the maximum investment limits stipulated in this Policy. The investment limits only apply at time of purchase or transfer. If a member account breaches an investment limit as a result of any other factors, no action will be taken. For example, the value of an asset may rise sharply and/or the value of other assets may reduce, causing a member’s holding in a particular investment option to exceed the investment limit (“passive breaches”). In these cases, the
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In addition, the Trustee may impose limits on lump sum withdrawals from pension accounts where the member’s portfolio includes an illiquid investment option.
Inter-fund in-specie transfers Where a member transfers assets between MLCSNF, DPM and PC, the investment limits will not apply. This exemption will apply to both successor fund transfers and individual account transfers. This exemption will only apply at the time of the inter-fund in-specie transfer. Subsequent purchases and ‘transfers in’ will be subject to the investment limits.
Linked accounts Where a member has more than one account, or two or more members have linked their accounts (e.g. a husband and wife), the investment limits may be applied to the aggregate of the accounts, rather than the individual accounts. The aggregated accounts: 1. Must all be superannuation or pension accounts (i.e. not ‘ordinary money’ accounts such as an IDPS); 2. Must all be within the same RSE; and 3. Can be a mixture of superannuation and pension accounts.
Corporate actions The member investment limits do not apply in the case of corporate actions, for example mergers, takeovers and rights issues.
Buy-in after buy-back A member may buy back into an ‘ordinary listed share’ in excess of the investment limits where they previously participated in a buy-back of that share. The following conditions apply: 1. The buy-in must occur within six months of the buy-back. 2. The member may only purchase up to the holding level (measured as a percentage of the member’s portfolio) that they held immediately prior to the buy-back. 3. Where the holding is a Top 300 ordinary listed share, the resulting exposure must not exceed the investment limit by more than 20% of the member’s portfolio and approval from the General Manager, Retail Super and Investments, is required. 4. In any other circumstances, approval by the Trustee is required.
Timing differences between contributions and investments In some circumstances it may be acceptable for members to temporarily breach the investment limits to accommodate the following transitional arrangements: 1. Where a rollover or additional contributions are due into the account which once received would bring the proportion of the member’s overall portfolio held within the respective investment option outside the investment limits; 2. Existing pension account members who wish to increase their pension benefit by first adding money to a super account and then consolidating this money with their existing pension account to commence a new pension; 3. Where a member commences an account which includes an in-specie transfer of investments that would cause the member to exceed an investment limit, where they also provide a sell request to reduce the holding to within the Trustee’s investment limit. The acquisitions of an investment in excess of the respective investment limit is permissible in relation to the above circumstances where the Trustee is provided with a reasonable basis for believing the breach will be corrected within six months. A written statement from the member’s financial adviser is required which outlines how the member’s portfolio is expected to return to a no-breach position within six
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Trustee’s discretion For all categories above, the Trustee may impose different restrictions to those shown, on a case-by-case basis. Where the Trustee is considering allowing a member to exceed the investment limits, the Trustee will examine: 1. The liquidity of the investment option which exceeds the limit; 2. The resulting liquidity of the member’s portfolio; 3. The approval status of the investment option and any issues raised in relation to the investment option by ThreeSixty’s quarterly monitoring; 4. Any subsequent events which may have undermined the quality of the investment option; 5. The asset allocation and diversification of the remainder of the member’s Portfolio. Where the Trustee approves for a member to exceed an investment limit, the member’s financial adviser must provide written confirmation that they have discussed this position with the member and that the member understands the risks associated with not adhering to the Trustee’s specified investment limits.
Delegation to General Manager, Retail Super and Investments The Trustee has delegated authority to the General Manager, Retail Super and Investments, to allow for members to exceed the investment limits in the following circumstances: 1. Buy-in after buy-back – Top 300 ordinary listed share excess exposure of no more than 20% of the member’s portfolio. 2. In-specie transfers or purchases of liquid investments where resulting exposure breaches relevant investment limits by no more than 20%, or the transfer relates to shares granted under an executive share scheme or received under an inheritance. 3. Timing differences between contributions and investments – Top 300 ordinary listed share excess exposure of no more than 20% of the member’s portfolio. Where the General Manager allows for a member to exceed an investment limit, the General Manager must require the member’s financial adviser to provide written confirmation that they have discussed this position with the member and that the member understands the risks associated with not adhering to the Trustee’s specified investment limits. The General Manager reports to the relevant Investment Committee on a quarterly basis on any approvals exercised under this delegated authority including whether the confirmation from financial advisers have been received.
Monitoring of compliance ThreeSixty reviews system parameters for the investment limits on a biannual basis, and reports any materially adverse findings and the actions taken to the Trustee.
16.2 In-specie transfers on request from members In-specie transfers involve the direct transfer of an asset (e.g. managed investment or listed security) into a superannuation or pension account by agreement to transfer ownership of the asset to the Trustee. Only MLCSNF, DPM and PC accept in-specie transfers on request from a member and the transfer must be undertaken with an appropriate and verifiable asset valuation. The assets covered by this Policy include all asset categories, e.g. managed funds, ASX listed investments, direct fixed interest. In-specie transfers are permitted on request from a member for products within MLCSNF, DPM and PC where: 1. A holding is being transferred between two of the Trustee’s RSEs or between products within the same RSE;
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2. The investment currently has an ‘Approved’ or ‘Hold’ rating within the respective product1; or 3. The investment is liquid and currently has a ‘Closed’ rating within the respective product and the Trustee has an existing holding in the investment; or 4. The investment is illiquid and thus technically ‘Closed’ but previously had an Approved or Hold rating and only became ‘Closed’ due to becoming illiquid; or 5. The investment relates to a managed fund that is ‘Closed’ but an equivalent version of the fund is rated ‘Approved’ or ‘Hold’. Examples of equivalent funds include: · Retail versions of wholesale funds, and vice versa · Hedged currency versions of unhedged funds, and vice versa.
Delegation to General Manager, Retail Super and Investments The Trustee has delegated authority to the General Manager, Retail Super and Investments to approve the in-specie transfer of investments which fail to meet the conditions outlined above, subject to each of the conditions below being satisfied: · The Superannuation Business Services Provider is able to properly administer the investment within existing operating processes; · The investment is a ‘listed security’ or ‘widely held unit trust’; · The transfer is able to be completed at market value; · The member has signed a form acknowledging that they have requested the transfer and includes disclaimers of trustee liability in relation to the merits of the investment; and · Where the investment is illiquid2, the member has signed an acknowledgement of the illiquid nature of the investments and the potential implications that this may have on the operation of their account. The General Manager reports to the relevant Investment Committee on a quarterly basis on any approvals exercised under this delegated authority. In-specie transfers are not permitted in all other circumstances and the Trustee or the Superannuation Business Services Provider may reject in-specie transfer applications, on a case-by-case basis, at their discretion.
In all cases, in-specie transfers must satisfy the member investment limits for the relevant class of assets, as outlined in section 16.1 of Part B. The following exemptions and additional requirements apply to in-specie transfers at the request of a member:
Investment type Investment restriction
Illiquid investments · A maximum of 20% of a member’s Portfolio can be invested in total in illiquid investments.
· If a member wishes to hold in excess of 20% of their portfolio in illiquid investments, they may request this from the General Manager, Retail Super and Investments. However, the General Manager will not approve transfers for illiquid investments that make up more than 50% of their portfolio
· Where the diversification policy for the investment’s sector is more restrictive than the above guidelines, the sector guidelines apply.
1 It should be noted that an investment may have an ‘Approved’ status but is not listed on the investment menu. In these circumstances, in-specie transfers are still permitted. 2 The existing policy criteria for holdings of illiquid investments must be satisfied post the in-specie transfer.
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Investment type Investment restriction
Liquid investments The limits relevant to the investment’s sector apply. Members may transfer in liquid assets in excess of the limits, subject to
· Approval from the General Manager, Retail Super and Investments where the proposed holding breaches a limit by no more than 20% of the member’s portfolio, or the transfer is that of shares granted under an executive share scheme or received under an inheritance; or
· Approval from Trustee, in all other cases.
16.3 Illiquid pensions This section applies to all pension products within an RSE with the exception of Term Allocated Pensions (also known as Growth Pensions).
Adverse economic and financial market conditions may result in investments becoming illiquid. For example, during the Global Financial Crisis (GFC) several fund managers suspended redemption processing or decided to wind up their funds. High exposure to illiquid investments is a risk in a pension product as the Trustee is required to pay a legislated minimum pension payment each financial year. The deduction of pension payments and ongoing administration costs for members with high exposure to illiquid investments may result in these members exhausting their cash holding and moving into a negative cash position.
A process is in place to actively monitor members with high exposures to illiquid investments in order to limit the instances of negative cash holdings. Further, this process also assesses whether or not a member’s account is able to satisfy legislated annual minimum pension payment requirements, as non- compliance may lead to the loss of preferential tax treatment relating to pension accounts. In this instance, the Trustee may approve that the pension may be ceased and the member’s benefits transferred back to accumulation phase.
The purpose of these provisions is to ensure pension members who are predominately invested in illiquid investments: · do not enter a negative cash position as a result of their regular pension payments; and · are transferred to superannuation accounts where it is assessed that they are unable to meet their legislative minimum income requirement.
16.3.1 Monitoring Pensions with illiquid investments are reviewed quarterly to ensure they hold sufficient liquid investments to meet three months of minimum pension payments and fees. A member’s pension account should (subject to below) be transferred to a superannuation account if the following is true: (a) < (b + c) Where: (a) is the liquid balance (including the cash balance) (b) is (3 x monthly admin fees) + (3 x monthly adviser fees) (c) Is (the pro-rated annual pension payment to the end of the current quarter) - (total pension paid YTD).
Note: that if the total pension paid YTD equals the annual pension payment then the value of (c) should be set to zero.
When assessing an account’s liquid holdings the following should also be considered: · where an account is calculated as having insufficient liquid investments and pension payments are above legislated requirements, the pension payments are to be reduced to the minimum and the account’s liquidity then re-calculated; and/or
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· where the required annual minimum pension payment has been met (including any lump sum payments), an account will only be required to hold sufficient liquid investments to meet applicable fees until 1 July of the next financial year.
In transferring a pension account to a superannuation account: • pro-rated minimum pension requirements (including any lump sum payments) must first be met; and • applicable fees should be discounted to the minimum amount allowable for the superannuation account.
16.3.2 Approval to Transfer The process of transferring members will not commence until written approval is received from the GM Retail Super and Investments. The GM Retail Super and Investments may determine not to transfer members where there are exceptional circumstances.
16.3.3 Communication The Trustee must ensure that affected members are provided with information regarding the transfer from pension to superannuation as required by the Corporations Act.
17. Proxy Voting Policy The Trustee represents shareholders of direct Australian listed securities in matters of corporate governance through the proxy voting process. The process is designed to protect and enhance the investment value of members' assets, recognising the strong link between good corporate governance and investment value. The Trustee’s proxy voting policy is to assess and vote (unless it has a good reason for abstaining) all proxies for every resolution in respect of holdings beneficially owned by the Trustee in ASX listed companies and managed investment schemes. Resolutions assessed as uncontentious, or contentious and immaterial will be voted in line with the Trustee’s chosen proxy adviser. Resolutions assessed as contentious and material are referred to the relevant Investment Committee for consideration on the exercise of the vote. In determining how to vote on behalf of members on contentious resolutions, the relevant Investment Committee will make an assessment, utilising information from a number of sources. These include, but are not limited to, market information and reports from independent corporate governance groups. Issues referable to the Investment Committee can range from the proposed issue of executive options without adequate performance hurdles to resolutions that may adversely affect the rights of existing shareholders. The relevant Investment Committee also takes into consideration best practice standards of corporate governance when considering the voting decision and reviews its processes on an ongoing basis. In the event that the MasterKey and Plum Investment Committee and the Super Wrap and IDPS Investment Committee resolve to vote differently in relation to the same resolution, both resolutions are to be escalated for decision by the Board.
The Trustee’s decision to assess and vote (unless it has a good reason for abstaining) all proxies for every resolution for companies publicly listed in Australia in which we have discretion to vote represents a serious commitment to encourage these companies to be accountable for their actions and to uphold good corporate governance. In accordance with the requirements of Financial Services Council (‘FSC’) Standard No. 13 ‘Proxy Voting’ (FSC Standard), the Trustee will exercise its proxy voting rights on all ASX listed investments. To comply with the FSC Standard the Trustee will: · maintain the proxy voting policy and make it available to members on the website1; · disclose whether or not it engages the services of proxy advisers;
1 Required by s29QB SIS
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· vote on all ASX listed securities’ resolutions where it has authority and responsibility to do so, unless it has good reason for abstaining; and · publish the proxy voting record for the previous financial year in the form required by the FSC Standard, within 20 business days of the end of each financial year.1
Recording and reporting of proxy votes The Trustee has delegated to ThreeSixty overall responsibility for the implementation and monitoring of the proxy voting policy, practices, disclosures and record-keeping on a day to day basis. ThreeSixty will maintain a register, detailing all of the corporate actions they receive, whether the vote was delegated (and to whom), the vote of the Trustee if relevant, and the voting decision. Votes may be submitted in one of the following three ways: · Vote For; · Vote Against; or · Vote Abstain2 ThreeSixty arranges for the summary of proxy voting decisions to be made available to members via the relevant websites each year.
Resolution of conflict of interests In the event of any actual or potential conflicts of interest that may arise in the exercise of proxy voting responsibility, any such conflict will be disclosed to the Trustee, as appropriate. The Trustee will review any conflicts relating to the voting of proxies and take action to avoid or manage any possible conflict of interest in the best interests of the members. In these instances, the Trustee will make appropriate disclosures to the members in the proxy voting policy published on the relevant websites. Only the non-executive members of the Trustee may vote on the proposals that confer a financial benefit to the Group or on entities controlled by the Group.
18. Securities Lending Policy The Trustee of NULIS is not opposed to implementing securities lending, providing that the Trustee can have confidence that the processes, practices and revenues are consistently in the best interests of investors. At the current time, MLCI (as Responsible Entity of the pooled trusts in which NULIS invests the majority of its assets in its directly managed options) has a policy that prohibits securities lending. NULIS has mandated to NAB Asset Management Services Limited (“NSL”) that no change in the MLCI policy to allow securities lending of its assets will be made without prior consultation and approval by NULIS.
1 The requirement to publish within 20 business days is detailed within ASIC’s Regulatory Guide RG252 ‘Keeping Superannuation Websites Up To Date’. 2 Abstain includes the delegation of voting decisions to the Chair of the shareholder meeting.
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Part C - Appendices 1. Investment Governance Structure Diagram
* The listed Investment Option Sub-categories are subject to change following approval by the Trustee ¹ Only applicable to Directly Managed Options
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2. Complexity Framework
Complexity ratings are assigned after considering the typical characteristics of investments within that investment option sub-category1 as shown in the below table (including any new sub-category required): Characteristics of low and high complexity investments:
Criteria Low Complexity Rating High Complexity Rating Range of, and ease of comprehension Low number of risks and those risks High number of risks associated with of the risks involved are well known and easily the investment comprehended Range of, and ease of comprehension Low number of performance drivers High number of performance drivers of the performance drivers and those drivers are well known and which are not easy to comprehend easily comprehended Level of complexity in product design Simplicity of design and high Multifaceted and complex product transparency in ‘workings’ design Level of complexity and the degree Low or no structuring, single layer of Moderate to high structuring, of structuring / number of layers / management, low number of multiple layers of management, number of involved parties counterparties moderate to high number of counterparties Level of Derivative use Low or no internal or external Moderate to high use of Derivatives gearing Moderate to high use of internal or external gearing Directionality (long only vs long / Long only Shorting of securities or indices, and short) /or short positions via Derivatives permitted
Complexity rating of the investment option sub-categories
Low Complexity High Complexity Investment Option Sub-Category Investment Option Sub-Category* Category Category Australian Equity Diversified Alternatives Hedge Funds Geared Private Equity Large Companies Single Strategy Responsible Investment Smaller Companies Balanced Diversified Real Return Cash Cash Enhanced Term Deposits Cautious2 Diversified Real Return
Conservative Diversified Real Return
Fixed Interest Australian Diversified International
Growth Diversified Australian Equity Long/Short Real Return
1 It is possible for an investment to be more or less complex than what is typical for the corresponding investment option category, in which case discretion may need to be applied with regard to whether additional research and enquiry may be warranted. The listed Investment Option Sub-categories are subject to change. 2 Only applicable to Directly Managed Options
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Low Complexity High Complexity Investment Option Sub-Category Investment Option Sub-Category* Category Category International Asia Fixed Interest Annuities Equity Concentrated Multi-Strategy Income Diversified Specialist Emerging Markets Europe Hedged Infrastructure Large Companies Resources Smaller Companies Property Australian Listed High Growth Real Return (Geared) Diversified International Listed International Equity Long/Short Property Hybrid
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3. MySuper and NAB Staff MySuper Investment Objectives and Strategy
MySuper Investment Objectives and Strategy NULIS Nominees (Australia) Limited
1 Overview 1.1 Establishment of MySuper NULIS Nominees (Australia) Limited (“the Trustee”) has appointed JANA Investment Advisers (“JANA”) to be its Investment Consultant and NAB Asset Management Services Limited (“NSL”) to be its Portfolio Manager under the Investment Consulting and Portfolio Management Deed (‘ICPM Deed’) for the MySuper investment option (“MySuper”). MySuper will become an investment option and be offered to members of MLC Super Fund (“MLCSF”). JANA provides advice to assist the Trustee to set the investment objective and investment strategy for MySuper. NSL then implements portfolios (primarily through unit trusts issued by MLC Investments Limited (“MLCI”)) designed to meet those investment objectives and in accordance with the investment strategy. JANA also conducts investment manager research to assist NSL in selecting investment managers for MySuper. The Trustee has formulated the investment objectives and investment strategy of MySuper and NSL has implemented the MySuper option after careful consideration of the following: . The risk and likely return of investments; . Liquidity and the ability to discharge existing and prospective liabilities, having regard to the expected cash flow of MySuper; . The availability of reliable valuation information; . Expected tax consequences; and . Costs that might be incurred. On the Trustee’s behalf, NSL will implement the investment strategy for MySuper in accordance with the strategy and processes detailed in this document. JANA and NSL will provide regular reports to the Trustee on their investment insights and updates on investment performance. The Trustee is satisfied that JANA and NSL have adequate capability and will exercise appropriate due diligence in the monitoring, implementation and ongoing management of the underlying assets of MySuper. 1.2 Ongoing governance MySuper will be governed under the Trustee’s investment governance frameworks. Governance will include the ongoing monitoring of implementation activities and performance of MySuper and reviewing the performance of JANA and NSL. The Trustee will also consider the efficiencies of implementation of its investment strategy as part of its annual MySuper scale determination process. The Trustee will initiate adjustments to the investment strategy of MySuper to ensure that it continues to meet its stated investment objectives, in the event that there is a significant change in the demographics of MySuper or in other circumstances that it determines to be in the best interests of members.
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2 Investment objective The investment objective for MySuper, including the return and risk target, are specified in the table below.
Investment Option To outperform inflation, as measured by the CPI by 3% p.a., after Objective investment fees and taxes, over rolling 10 year periods. Target Investment Taking the inflation target range of the Reserve Bank of Australia Return as at the date of this publication, the expected return over a rolling period of 10 years would be at least 5.5% p.a. after fees and taxes. Target Risk Medium to high, targeted at between 3 and 4 negative annual Objective returns over any 20-year period.
The target investment return is determined by JANA’s expectations of long term returns from the investment asset classes that comprise MySuper. The target risk objective is also based on the long term experience of the volatility in returns from each of these asset classes. The target investment returns and target risk objectives will be reviewed annually and updated if required.
Secondary To exceed the 6oth percentile of the SuperRatings Balanced Option Investment crediting rate survey over rolling 5 year periods. Objective1
3 Appropriate level of investment risk 3.1 Risk factors consideration In setting the investment strategy for MySuper, the Trustee aims to produce a sound level of real returns over time while managing risk by investing in a diversified portfolio that comprises a range of different return and risk sources. The risk factors considered include: . The expected risk and return profile of the asset classes to which MySuper is exposed; . The demographic profile of the membership base, including the average age of members and the distribution of age groups by member numbers and assets under management; . The average account balance and the distribution of account balance size by age groups;
. Liquidity; . The expected net cash flow of MySuper; . The level of investment commitments and other potential draw downs on cash, such as rebalancing to the neutral asset allocation and currency overlays; . Strategic risk, including the positioning of competitors insofar as it relates to promoting the financial interests of MySuper members (e.g. as it relates to scale). 3.2 Setting the level of risk The Trustee determined the risk/return profile of MySuper after considering the relevant risk factors, in particular, after close consideration of the member profile which is the primary driver in setting the level of risk. The key aspects of member profile considered are the average
1 Approved for inclusion in the Policy and in the Risk Appetite Statement by the MPIC in May 2017
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Commercial in Confidence Investment Governance Policy age of members, the distribution of members by age groups, the average funds under management and the investment horizon of the average member. Other aspects of risk are documented in the Investment Governance Policy. In setting the level of risk, the Trustee also reviews the outcome of scenarios modelling provided by JANA. 3.3 Liquidity Generally, liquidity of the MySuper portfolio should be sufficient to meet day-to-day expenses and payments, such as fees, insurance premiums and redemption requests during both normal and crisis conditions. Sufficient liquid assets will be held to ensure day-to-day expenses and payments can be met for at least one month in a range of scenarios. Cash flows of MySuper will be managed in the same way as all other investment options within MLCSF. Other aspects of liquidity are documented in the Trustee’s Liquidity Management Plan. The Trustee’s Risk Appetite Statement sets out the Trustee’s appetite for liquidity risk. Schedule 1 of the Risk Appetite Statement sets out the Trustee’s required percentage of as sets that can be converted to cash within set timeframes during a crisis scenario, in addition to other liquidity measures.
3.3.1 Definitions Illiquid asset An illiquid asset is an investment that cannot be converted to cash in less than 30 days or where converting it to cash within 30 days is likely to have a significant adverse impact on its realisable value. Examples of the type of assets this would include are unitised/pooled products such as unlisted property or unlisted Infrastructure; hedge funds; private equity. Liquid asset A liquid asset is one that can be converted to cash within 30 days without having a significant adverse impact on its realisable value. Examples of the type of assets this would include are cash and other investment grade bank bills or deposits at call; unitised/pooled products with underlying liquid listed holdings; and any other securities meeting the Superannuation Industry (Supervision) Act 1993 definition of liquid. The Trustee will monitor liquidity within MySuper annually or more regularly, based on reporting provided, if market movements or member activity warrants this.
3.3.2 Measuring and monitoring liquidity The Trustee recognises outperformance of investment objectives is potentially available in the long term from investing a proportion of MySuper in assets which have a longer lead time to deliver expected performance. Such assets are generally not readily convertible into cash and the Trustee has a responsibility to ensure that assets can be reinvested as required to meet changing needs. To manage the MySuper liquidity risk, the Trustee: . Maintains adequate diversification of illiquid assets in MySuper in order to limit exposure to any single event or market risk. It is acknowledged that extreme falls in liquid investment values could cause the percentage in illiquid assets to (temporarily) rise and the Trustee will review the exposure of MySuper to illiquid assets in such circumstances. . Utilises the expertise of JANA and NSL to undertake stress testing to consider how the liquidity of MySuper can be managed in a range of stress scenarios.
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3.3.3 MySuper liquidity The liquidity within the MySuper portfolio is expected to exceed the minimum liquidity thresholds in Schedule 1 of the Trustee’s Risk Appetite Statement. In addition, net cash flow is expected to be positive, and the level of potential draw downs on cash is modest and taken into account in the setting and management of asset allocation. 4 Investment strategy implementation The Trustee is responsible for managing the investment strategy for MySuper. The MySuper investment strategy is implemented by NSL in accordance with the terms and conditions of the MLCSF trust deed and the ICPM Deed. The Trustee may hold some assets directly (not through underlying unit trusts) where appropriate. 4.1 Investment selection JANA and NSL undertake extensive research of financial markets and investment managers, following defined processes and criteria to ensure that effective due diligence comme nsurate with the nature and characteristics of each investment is undertaken. NSL’s research into investments includes detailed portfolio analysis, risk and return analysis, including stress scenarios covering a range of factors, and due diligence of the investment opportunity (which may be carried out by JANA) including, where relevant, a manager’s investment process, team and organisational aspects. When NSL considers an investment, it will satisfy itself to the level of detail appropriate to the circumstances that: . It has sufficient understanding of how the investment will perform under a range of stress scenarios; and . It has sufficient understanding and knowledge of the investment, including an assessment of any factors that could have a material impact on achieving the investment objectives of MySuper. The investment managers then select underlying investments in line with mandates set by NSL. These are monitored on an ongoing basis and any material breaches of the mandates are reported as appropriate to the relevant Trustee Investment Committee (or to the relevant MLCI Board Committee where the mandate is within an MLCI unit trust). 4.2 Investment monitoring The Trustee monitors performance to: a) Evaluate whether the return and risk objectives of MySuper are being met; b) Compare the performance of MySuper against agreed performance benchmarks; c) Review any concerns identified with the construction of MySuper; and d) Assess whether the strategy should be amended. The Trustee receives regular performance reporting and attribution from JANA based on the underlying asset class performance of MySuper, relative to the following current asset class benchmarks:
Asset Class Benchmark Australian shares S&P/ASX 300 Accumulation Index, ASX 200 prior to 1 November 2002 International shares MSCI All Country World Index Net Dividends Reinvested expressed (unhedged) in AUD, MSCI World Index prior to 1 September 2002 International shares MSCI All Country World Index Net Dividends Reinvested (Hedged (hedged) into AUD), MSCI World Index Hedged prior to 1 September 2002
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Asset Class Benchmark Property 50:50 Mercer IPD Property Pooled Fund Index / FTSE EPRA/NAREIT Global Developed Index (hedged into AUD) Private equity MSCI All Country World Index Net Dividends Reinvested (Hedged into AUD) + 3%, MSCI World Index Hedged prior to 1 September 2002 Infrastructure 50:50 CPI+5%/Listed infrastructure index Growth alternatives Bloomberg AusBond Bank Bill Index + 4% Defensive alternatives Bloomberg AusBond Bank Bill Index + 2% Fixed interest 50:50 Bloomberg Composite Bond Index (All Maturities) / Bloomberg Barclays Global Aggregate (Hedged to AUD) Cash Bloomberg AusBond Bank Bill Index
4.3 Valuation of investments The Trustee’s key principles in respect of the valuation of investments are: . Asset valuations must not be subject to any undue influence or bias and should be independently verifiable. . Where an active market exists at a given valuation point, all asset valuations should be derived from the latest available market close. Where a market does not exist or where the market is unreliable, a review will be undertaken to determine an appropriate value which could be the last available sale price, an alternative price or a value from a third party valuation expert with appropriate expertise. . Similar assets should be valued consistently. . Asset valuation methodologies must be consistent with constituent and offer documents and all other legal obligations. . Assets must be valued assuming the portfolio is a going concern, unless the assumption is not appropriate for the portfolio. . Generally, assets must be valued at least as frequently as interests in the fund may be traded (generally daily), except where this is not practical for certain asset types (e.g. private equity) or where it is appropriate to the nature of the asset to value it on a less frequent basis. A large proportion of the underlying assets of MySuper are valued by MLCI in its capacity as Responsible Entity of the MLCI unit trusts. The Trustee is satisfied that MLCI’s processes and governance over the valuation of assets are aligned to the Trustee’s principles and the interests of MySuper members. 5 Diversification and portfolio construction 5.1 Portfolio diversification The Trustee believes that, to achieve the investment objectives established for MySuper, a diversified investment approach should be adopted. This includes diversification of asset classes, managers, investment styles and underlying securities. This approach is adopted as investment markets are uncertain and diversifying investments across many different assets that derive returns from different economic and financial drivers maximises the ability of MySuper to meet its investment objectives.
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The MySuper portfolio diversifies its exposure to individual risks across and within asset classes in seeking to achieve the return and risk target, and as the primary means to avoid undue risk of large losses. Asset classes generally consist of multi-manager portfolios diversified by investment approach. The investment strategy is constructed to best achieve the investment objective within the risk parameters established for the portfolio. The appropriate level of diversification for MySuper is determined by: . Identifying the key risks and sources of return; . Identifying the way in which these sources of return interact under different market conditions; . Determining appropriate limits of exposure to the relevant identified risks; and . Determining the asset classes and individual assets to invest in to achieve the return objectives within the appropriate limits of exposure to the relevant risk exposures. Risks that may be considered include: . Market risks (e.g. price volatility of types of investments, leverage risk, liquidity risks); . Economic risks (e.g. growth, inflation, currency); . Asset specific risks (e.g. construction risk, tenancy risk, regulatory risk); and . Execution and operational risks (e.g. manager risk, cash flow risk, defalcation risk). The Trustee considers investments in terms of asset classes. The table below contains a description of the asset classes used in constructing MySuper.
Asset class Description Australian shares Investments in Australian listed securities. International shares Investments in internationally listed securities. Property Investments in Australian or international, retail, commercial, industrial, or domestic property. Investments can be either via unlisted property trusts or listed property trusts. Private equity Investments in domestic and international private equity. Infrastructure Investments in global and domestic infrastructure, including both listed and unlisted infrastructure investments. Growth alternatives Investment in other growth assets, including hedge funds and insurance related investments. Defensive alternatives Investment in other defensive assets, including credit and absolute return mandates. Fixed interest Investments in domestic and global fixed interest securities including corporate securities/bonds, mortgage securities, macro strategies, and micro credit security strategies. Cash Investments in domestic retail or wholesale cash at call or fixed term deposit facilities, which may be covered by the Federal Government Bank Guarantee Scheme. Can include investments in high quality domestic cash and cash like securities including floating rate notes, mortgage securities, promissory note, cash at call, and cash deposits.
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5.2 Neutral asset allocation and ranges For MySuper, different asset classes are combined to build a diversified portfolio constructed to achieve specified return and risk targets. The Trustee, with advice from JANA, determines the target, and acceptable ranges of asset allocation for MySuper. The current neutral asset allocation and ranges for MySuper appear below:
MySuper Neutral Asset Allocation Ranges Australian shares 28% 10% - 40% International shares (hedged) 8% 10% - 40% International shares (unhedged) 17% Property 5% 0% - 15% Private equity 5% 0% - 15% Infrastructure 2% 0% - 15% Growth alternatives 5% 0% - 15% Defensive alternatives 7% 0% - 20% Fixed interest 18% 0% - 40% Cash 5% 0% - 30% Total Growth 70% 55% - 85% Total Defensive 30% 15% - 45% TOTAL 100%
The neutral asset allocation to defensive assets (fixed interest, defensive alternatives and cash) in total is 30%. JANA utilises the full range for each of the defensive sub-sectors as it is entirely possible that any one of these sub-sectors may be extremely unattractive or extremely attractive at any point in time, relative to each other. The current neutral allocation to cash is 5%, however the neutral allocation could at different times in the market cycle be anywhere from 0% up to 30% depending on market views and relative value. In practice, if there is a neutral allocation of 0% this means that as little cash as possible is held in the portfolio, but this is likely to be a small positive amount (between 0% and 2%). Given the very large size of MLCSF, the expected size of and cash flows into MySuper, and the substantial proportion of MySuper that is liquid, it is possible to meet day-to-day cash flow needs and still retain a small percentage holding in cash. 5.3 Diversification within asset classes The Trustee ensures adequate diversification by investment manager and investment styles within each asset class. The Trustee uses a multi-manager process where: . NSL is responsible for selecting underlying fund managers within MySuper, following defined processes and criteria in its research to ensure that effective due diligence commensurate with the nature and characteristics of each investment is undertaken and ensuring the diversification of fund managers is appropriate to deliver the investment objective. . NSL is responsible for monitoring compliance by the underlying investment managers with investment management guidelines on a regular basis. . NSL is required to ensure that the portfolios they manage in respect of MySuper are not leveraged and cash, cash equivalents or physical securities are held to cover net derivative positions entered into.
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The activities of NSL are overseen by the Trustee. 5.4 Rebalancing Rebalancing of the MySuper asset portfolio normally occur when the asset allocation moves beyond a +/- 2% rebalancing range around neutral asset allocations. When a deviation greater than +/- 2% occurs, the asset allocation is restored halfway back to neutral asset allocation. This methodology has been determined by NSL to result in the most efficient management of asset allocation over time and allows the portfolio to optimise for trending markets (e.g. if a market is falling, rebalancing halfway increases the exposure as the market falls, but since markets often continue to fall even lower, necessitating subsequent rebalances, the further purchase of exposure happens at a lower price and vice versa with rising markets). The efficient allocation of cash flows means that the +/- 2% rebalancing ranges will rarely be exceeded1. However, sudden and significant market movements may mean that allocations move outside these ranges and the requirement to rebalance will be reviewed in this context. Rebalancing is reviewed daily. Cash flows into or out of MySuper are used to move funds back towards their neutral asset allocation by buying underweight asset classes when there is inflow and selling overweight asset classes when there is outflow. This reduces the likelihood of a rebalance being required. Crosses (i.e. offsetting inflows with outflows) or in specie transfers and appropriate off-market techniques are used to minimise transaction costs and tax associated with any cash flow or rebalancing activity. The Trustee monitors rebalancing activity to ensure that these ranges are being observed on a quarterly basis. 6 Stress testing The Trustee utilises the expertise of JANA to undertake stress testing of the MySuper investment strategy on a periodic basis. The Trustee uses the outcomes of this testing to determine the optimal investment strategy for MySuper, and whether future adjustments to the strategy are required. NSL also applies stress testing in performing its portfolio management services. The Trustee is satisfied that the stress testing processes and methodologies used by JANA and NSL are robust and appropriate for MySuper. The Trustee will receive reporting from JANA to allow it to assess whether any adjustment to the investment strategy is required. The Trustee also considers any recommendations from JANA in connection with stress testing outcomes. 6.1 Overview of the stress testing approach JANA determines stress scenarios which are applied at various stages of the investment process. In summary, the impact of stress scenarios is considered at a minimum at the stages of: a) Formulating the investment strategy and prior to its implementation. b) Selecting investments to give effect to the strategy. c) Monitoring the investment strategy. The stress scenarios determined by JANA and NSL are selected so as to cover a range of factors that can create extraordinary losses or make the control of risk in the investment strategy difficult. In applying stress scenarios as part of the investment process, JANA and NSL take into account: . Characteristics of different investment pools within the Fund which might give rise to different manifestations of stress outcomes. These may be a function of differences in
1 The rebalancing range can be changed by NSL as notified to the Trustee.
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the expected liability profile and liquidity requirements of the respective investment strategies. . Both historical scenarios that have been observed over time, and forward looking scenarios so as to capture the spectrum of available scenarios. Forward scenarios are grounded in observable relationships. . Multiple dimensions of scenarios giving rise to investment stress: market impact (e.g. macroeconomic or systemic shocks), operational issues (e.g. liquidity needs for currency hedging) and member action (e.g. large scale switching). Often it is the cumulative effect of a combination of factors that will result in the most extreme pressures. JANA reviews the range of scenarios annually and, where necessary, makes amendments. It is likely that a number of scenarios are likely to be consistently applied, including: Historical scenarios a) 1994 Bond Market Crisis b) 1997 Asian currency crisis c) 2000 Dotcom d) 2008 Global Financial Crisis Forward looking scenarios a) Global financial collapse b) Inflation shock c) Recession/Stagnation d) Stagflation. These scenarios are paired with accompanying operational and member action stress conditions, including those covering: . Capital demands as a result of outstanding commitments; . Operational cash requirements (currency hedge mark-to-market etc.); . Implications of rebalancing; and . The investment consequences of member switching activity. Formal stress testing takes place annually. Stress testing may take place at other times as determined by JANA as part of the ongoing investment monitoring process. 7 Review of the investment strategy The Trustee reviews the investment strategy, incorporating the investment objective, of MySuper on an annual basis in consultation with JANA. The review process is undertaken in accordance with the Trustee’s investment governance framework. The Trustee also conducts a review of the investment strategy and investment objectives at other times in the event of the following triggers: . The Trustee determines that a review is warranted due to a change in circumstances since the last annual review such as: o A significant change in the number of members and profile of membership of MySuper; o A significant change in the size, business mix and complexity of the MLCSF; or o An adverse finding in its scale determination assessment; . Regulatory or tax changes that are relevant and material;
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. Results of stress testing reveal that the investment strategy is no longer appropriate for MySuper; and . Significant events in global financial markets that materially alter the fundamental case and risk-return outlook for asset classes. If any of the above triggers arises Corporate Super, in consultation with JANA, will present any recommended changes for the investment strategy to the Trustee. JANA also monitors and reassesses the investment strategy on a continuous basis, wit h updates to the scenarios model occurring at least annually. JANA/NSL will report to the Trustee in the event of: . Significant changes in the liquidity terms of any material underlying assets; . Changes in investment beliefs of JANA or NSL such that certain assets or investment strategies are no longer considered appropriate or, where previously not, are now considered appropriate; . Changes in the long term outlook for asset classes such that JANA or NSL determines that the return and risk expectations of MySuper can be improved while still meeting the investment objectives; or . Any other changes that JANA or NSL determines will have a significant impact on ability to achieve investment objectives. The results of a review of the investment strategy are reported to the Trustee as soon as practicable after the review is completed. The results will clearly state the rationale for performing the review and any recommendations or action items and timeframes for consideration by the Trustee. 8 Investment scale The Trustee will determine on an annual basis whether members may be disadvantaged, in comparison to the members of other MySuper products, because the financial interests of the members are affected by various factors as documented in the MySuper Scale Determination Process. All of the underlying investment pools used by MySuper will have significant scale due to their structural integration with the investment of assets from other investment options within the MLCSF. This provides MySuper members with a scale advantage through minimisation of investment costs. 9 Review and document history The MySuper Investment Objectives and Strategy are incorporated into the Trustee’s Investment Governance Policy. A review of the appropriateness, effectiveness and adequacy of the MySuper Investment Objectives and Strategy document is undertaken at least every 3 years in conjunction with the review of the Investment Governance Policy, or more regularly if required. The results of the review are reported to the Trustee for consideration.
Author Version Date Revision Detail Approval Date
Corporate 1.0 1 July 2016 First version 9 June 2016 Super
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10 References Prudential Standard SPS 530 Investment Governance Prudential Practice Guide SPG 530 Investment Governance Prudential Practice Guide SPG 531 Valuation Superannuation Industry (Supervision) Act 1993 - Section 52(6) Superannuation Industry (Supervision) Act 1993 - Section 29VN MySuper Scale Determination Process Policy
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NAB Staff MySuper Investment Objectives and Strategy NULIS Nominees (Australia) Limited
1 Overview 1.1 Establishment of NAB Staff MySuper NULIS Nominees (Australia) Limited (“the Trustee”) has appointed JANA Investment Advisers (“JANA”) to be its Investment Consultant and NAB Asset Management Services Limited (“NSL”) to be its Portfolio Manager under the Investment Consulting and Portfolio Management Deed (‘ICPM Deed’) for the tailored NAB Staff MySuper investment option . NAB Staff MySuper is a tailored investment option offered to members in the NAB Group corporate plan within the Plum Corporate Super product segment of the MLC Super Fund (“MLCSF”). JANA provides advice to assist the Trustee to set the investment objective and investment strategy for the NAB Staff MySuper. NSL then implements portfolios (primarily through unit trusts issued by MLC Investments Limited (“MLCI”)) designed to meet those investment objectives and in accordance with the investment strategy. JANA also conducts investment manager research to assist NSL in selecting investment managers for the NAB Staff MySuper. The Trustee has formulated the investment objectives and investment strategy of NAB Staff MySuper and NSL has implemented the NAB Staff MySuper option based on the following: . The risk and likely return of investments; . Liquidity and the ability to discharge existing and prospective liabilities, having regard to the expected cash flow of NAB Staff MySuper; . The availability of reliable valuation information; . Expected tax consequences; and . Costs that might be incurred. On the Trustee’s behalf, NSL will implement the investment strategy for NAB Staff MySuper in accordance with the strategy and processes detailed in this document JANA and NSL will provide regular reports to the Trustee on their investment insights and updates on investment performance. The Trustee is satisfied that JANA and NSL have adequate capability and will exercise appropriate due diligence in the monitoring, implementation and ongoing management of the underlying assets of NAB Staff MySuper. 1.2 Ongoing governance NAB Staff MySuper is governed under the Trustee’s investment governance frameworks. Governance will include the ongoing monitoring of implementation activities and performance of NAB Staff MySuper and reviews of the performance of JANA and NSL. The Trustee will also consider the efficiencies of implementation of its investment strategy as part of its annual NAB Staff MySuper scale determination process. The Trustee initiates adjustments to the investment strategy of NAB Staff MySuper to ensure that it continues to meet its stated investment objectives, in the event that there is a significant change in the demographics of NAB Staff MySuper or in other circumstances that it determines to be in the best interests of members.
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2 Investment objective The investment objective for NAB Staff MySuper, including the return and risk target, are specified in the table below.
Investment Option To outperform inflation, as measured by the CPI by 3% p.a., after Objective investment fees and taxes, over rolling 10 year periods. Target Investment Taking the inflation target range of the Reserve Bank of Australia Return as at the date of this publication, the expected return over a rolling period of 10 years would be at least 5.5% p.a. after fees and taxes. Target Risk High, targeted at 4 negative annual returns over any 20-year Objective period.
The target investment return is determined by JANA’s expectations of long term returns from the investment asset classes that comprise MySuper. The target risk objective is also based on the long term experience of the volatility in returns from each of these asset classes. The target investment return and target risk objectives will be reviewed annually and updated if required.
Secondary To exceed the 6oth percentile of the SuperRatings Balanced Option Investment crediting rate survey over rolling 5 year periods. Objective1
3 Appropriate level of investment risk 3.1 Risk factors consideration In setting the investment strategy for NAB Staff MySuper, the Trustee aims to produce a sound level of real returns over time while managing risk by investing in a diversified portfolio that comprises a range of different return and risk sources. The risk factors considered include: . The expected risk and return profile of the asset classes to which NAB Staff MySuper is exposed; . The demographic profile of the membership base, including the average age of members and the distribution of age groups by member numbers and assets under management; . The average account balance and the distribution of account balance size by age groups; . Liquidity; . The expected net cash flow of NAB Staff MySuper; . The level of investment commitments and other potential draw downs on cash, such as rebalancing to the neutral asset allocation and currency overlays; . Strategic risk, including the positioning of competitors insofar as it relates to promoting the financial interests of NAB Staff MySuper members (e.g. as it relates to scale).
1 Approved for inclusion in the Policy and in the Risk Appetite Statement by the MPIC in May 2017
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3.2 Setting the level of risk The Trustee determined the risk/return profile of NAB Staff MySuper after considering the relevant risk factors, and, in particular, after close consideration of the member profile which is the primary driver in setting the level of risk. The key aspects of member profile considered was the average age of members, the distribution of members by age groups, the average funds under management and the investment horizon of the average member. Other aspects of risk are documented in the Investment Governance Policy. In setting the level of risk, the Trustee also reviews the outcome of scenarios modelling provided by JANA. 3.3 Liquidity Generally, liquidity of the NAB Staff MySuper portfolio should be sufficient to meet day-to-day expenses and payments, such as fees, insurance premiums and redemption requests during both normal and crisis conditions. Sufficient liquid assets are held to ensure day-to-day expenses and payments can be met for at least one month in a range of scenarios. Cash flows of NAB Staff MySuper is managed in the same way as all other investment options within MLCSF. Other aspects of liquidity are documented in the Trustee’s Liquidity Management Plan. The Trustee’s Risk Appetite Statement sets out the Trustee’s appetite for liquidity risk. Schedule 1 of the Risk Appetite Statement sets out the Trustee’s required percentage of assets that can be converted to cash within set timeframes during a crisis scenario, in addition to other liquidity measures.
3.3.1 Definitions Illiquid asset An illiquid asset is an investment that cannot be converted to cash in less than 30 days or where converting it to cash within 30 days is likely to have a significant adverse impact on its realisable value. Examples of the type of assets this would include are unitised/pooled product s such as unlisted property or unlisted Infrastructure; hedge funds; private equity. Liquid asset A liquid asset is one that can be converted to cash within 30 days without having a significant adverse impact on its realisable value. Examples of the type of assets this would include are cash and other investment grade bank bills or deposits at call; unitised/pooled products with underlying liquid listed holdings; and any other securities meeting the Superannuation Industry (Supervision) Act definition of liquid. The Trustee will monitor liquidity within NAB Staff MySuper annually or more regularly, based on reporting provided, if market movements or member activity warrants this.
3.3.2 Measuring and monitoring liquidity The Trustee recognises outperformance of investment objectives is potentially available in the long term from investing a proportion of NAB Staff MySuper in assets which have a longer lead time to deliver expected performance. Such assets are generally not readily convertible into cash and the Trustee has a responsibility to ensure that assets can be reinvested as required to meet changing needs. To manage the NAB Staff MySuper liquidity risk, the Trustee: . Maintains adequate diversification of illiquid assets in NAB Staff MySuper in order to limit exposure to any single event or market risk. It is acknowledged that extreme falls in liquid investment values could cause the percentage in illiquid assets to (temporarily)
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rise and the Trustee reviews the exposure of NAB Staff MySuper to illiquid assets in such circumstances. . Utilises the expertise of JANA and NSL to undertake stress testing to consider how the liquidity of NAB Staff MySuper can be managed in a range of stress scenarios.
3.3.3 NAB Staff MySuper liquidity The liquidity within the NAB Staff MySuper portfolio is expected to exceed the minimum liquidity thresholds in Schedule 1 of the Trustee’s Risk Appetite Statement. In addition, net cash flow is expected to be positive, and the level of potential draw downs on cash is modest and taken into account in the setting and management of asset allocation. 4 Investment strategy implementation The Trustee is responsible for managing the investment strategy for NAB Staff MySuper. The NAB Staff MySuper investment strategy is implemented by NSL in accordance with the terms and conditions of the MLCSF trust deed. The trustee may hold some assets directly (not through underlying unit trusts) where appropriate and the NAB Group corporate plan participation schedule. NAB Staff MySuper will invest primarily in growth assets such as equities and property with some exposure to alternative assets and defensive assets such as fixed interest and cash. 4.1 Investment selection JANA and NSL undertake extensive research of financial markets and investment managers, following defined processes and criteria to ensure that effective due diligence commensurate with the nature and characteristics of each investment is undertaken. NSL’s research into investments includes detailed portfolio analysis, risk and return analysis, including stress scenarios covering a range of factors, and due diligence of the investment opportunity (which may be carried out by JANA) including, where relevant, a manager’s investment process, team and organisational aspects. When NSL considers an investment, it satisfies itself to the level of detail appropriate to the circumstances that: . It has sufficient understanding of how the investment will perform under a range of stress scenarios; . It has sufficient understanding and knowledge of the investment, including an assessment of any factors that could have a material impact on achieving the investment objectives of NAB Staff MySuper. The investment managers then select underlying investments in line with mandates set by NSL. These are monitored on an ongoing basis and any material breaches of the mandates are reported to relevant Trustee Investment Committee (or to the relevant MLCI Board Committee where the mandate is within an MLCI unit trust). 4.2 Investment monitoring The Trustee monitors performance to: e) Evaluate whether the return and risk objectives of NAB Staff MySuper are being met; f) Compare the performance of NAB Staff MySuper against agreed performance benchmarks; g) Review any concerns identified with the construction of NAB Staff MySuper; and h) Assess whether the strategy should be amended. The Trustee receives regular performance reporting and attribution from JANA based on the underlying asset class performance of NAB Staff MySuper, relative to the following asset class benchmarks:
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Asset Class Benchmark Australian shares S&P/ASX 300 Accumulation Index International shares MSCI All Country World Index Net Dividends Reinvested expressed (unhedged) in AUD International shares MSCI All Country World Index Net Dividends Reinvested (Hedged (hedged) into AUD) Property 50:50 Mercer IPD Property Pooled Fund Index / FTSE EPRA/NAREIT Global Developed Index (hedged into AUD) Private equity MSCI All Country World Index Net Dividends Reinvested (Hedged into AUD) + 3%, MSCI World Index Hedged prior to 1 September 2002 Growth alternatives Bloomberg AusBond Bank Bill Index + 4% Defensive alternatives Bloomberg AusBond Bank Bill Index + 2% Fixed interest 50:50 Bloomberg Composite Bond Index (All Maturities) / Bloomberg Barclays Global Aggregate (Hedged to AUD), Cash Bloomberg AusBond Bank Bill Index
4.3 Valuation of investments The Trustee’s key principles for the purpose of the valuation of investments are: . Asset valuations must not be subject to any undue influence or bias and should be independently verifiable. . Where an active market exists at a given valuation point, all asset valuations should be derived from the latest available market close. Where a market does not exist or where the market is unreliable, a review will be undertaken to determine an appropriate value which could be the last available sale price, an alternative price or a value from a third party valuation expert with appropriate expertise. . Similar assets should be valued consistently. . Asset valuation methodologies must be consistent with constituent and offer documents and all other legal obligations. . Assets must be valued assuming the portfolio is a going concern, unless the assumption is not appropriate for the portfolio. . Generally, assets must be valued at least as frequently as interests in the fund may be traded (generally daily), except where this is not practical for certain asset types (e.g. private equity) or where it is appropriate to the nature of the asset to value it on a less frequent basis. All of the underlying assets of NAB Staff MySuper are valued by MLCI in its capacity as Responsible Entity of the MLCI unit trusts. The Trustee is satisfied that MLCI’s processes and governance over the valuation of assets are aligned to the Trustee’s principles and the interests of NAB Staff MySuper members and has approved the use of the Asset Valuation Policy of MLCI. 5 Diversification and portfolio construction 5.1 Portfolio diversification The Trustee believes that, to achieve the investment objectives established for NAB Staff MySuper, a diversified investment approach should be adopted. This includes diversification of asset classes, managers, investment styles and underlying securities. This approach is adopted as investment markets are uncertain and diversifying investments across many different assets that
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Asset class Description Australian shares Investments in Australian listed securities. International shares Investments in internationally listed securities. Property Investments in Australian or international, retail, commercial, industrial, or domestic property. Investments can be either via unlisted property trusts or listed property trusts. Private equity Investments in domestic and international private equity. Growth alternatives Investment in other growth assets, including hedge funds and insurance related investments. Defensive alternatives Investment in other defensive assets, including credit and absolute return mandates. Fixed interest Investments in domestic and global fixed interest securities including corporate securities/bonds, mortgage securities, macro strategies, and micro credit security strategies. Cash Investments in domestic retail or wholesale cash at call or fixed term deposit facilities, which may be covered by the Federal Government Bank Guarantee Scheme. Can include investments in high quality domestic cash and cash like securities including floating rate notes, mortgage securities, promissory note, cash at call, and cash deposits.
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5.2 Neutral asset allocation and ranges For NAB Staff MySuper, different asset classes are combined to build a diversified portfolio constructed to achieve specified return and risk targets. The Trustee, with advice from JANA, determines the target, and acceptable ranges of asset allocation for NAB Staff MySuper. The current neutral asset allocation and ranges for NAB Staff MySuper appear below:
NAB Staff MySuper Neutral Asset Allocation Ranges Australian shares 34% 20% - 40% International shares 26% 20% - 40% Property 12% 5% - 20% Private equity 0% 5% - 25% Growth alternatives 4% 5% - 25% Defensive alternatives 8% 5% - 25% Fixed interest 14% 0% - 25% Cash 2% 0% - 20% Total Growth 76% 55% - 85% Total Defensive 24% 15% - 45% TOTAL 100% Currently, the neutral asset allocation to defensive assets (fixed interest, defensive alternates and cash) in total is 24%. JANA may utilise the full range for each of the defensive sub-sectors as it is entirely possible that any one of these sub-sectors may be extremely unattractive or extremely attractive at any point in time, relative to each other. The current neutral allocation to cash is 2%, however the target allocation could at different times in the market cycle be anywhere from 0% up to 20% depending on market views and relative value. In practice, if there is a neutral allocation of 0% this means that as little cash as possible is held in the portfolio, but this is likely to be a small positive amount (between 0% and 2%). Given the large size of NAB Staff MySuper, and the proportion of NAB Staff MySuper that is liquid, it is possible to meet day- to-day cash flow needs and still retain a small percentage holding in cash. 5.3 Diversification within asset classes The Trustee ensures adequate diversification by investment manager and investment styles within each asset class. The Trustee uses a multi-manager process where: . NSL is responsible for selecting underlying fund managers within NAB Staff MySuper, following defined processes and criteria in its research to ensure that effective due diligence commensurate with the nature and characteristics of each investment is undertaken and ensuring the diversification of fund managers is appropriate to deliver the investment objective. . NSL is responsible for monitoring compliance by the underlying investment managers with investment management guidelines on a regular basis. . NSL is required to ensure that the portfolios they manage are not leveraged and cash, cash equivalents or physical securities are held to cover net derivative positions entered into. The activities of NSL are overseen by the Trustee.
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5.4 Rebalancing Rebalancing of the NAB Staff MySuper asset portfolio will normally occur when the asset allocation moves beyond a +/- 3% rebalancing range around neutral asset allocations. When a deviation greater than +/- 3% occurs, the asset allocation is restored halfway back to neutral asset allocation. This methodology has been determined by NSL to result in the most efficient management of asset allocation over time and allows the portfolio to optimise for trending markets (e.g. if a market is falling, rebalancing halfway increases the exposure as the market falls, but since markets often continue to fall even lower, necessitating subsequent rebalances, the further purchase of exposure happens at a lower price and vice versa with rising markets). The efficient allocation of cash flows means that the +/- 3% rebalancing ranges will rarely be exceeded. However, sudden and significant market movements may mean that allocations move outside these ranges and the requirement to rebalance will be reviewed in this context. When the investment strategy is implemented, rebalancing will be reviewed daily. Cash flows into or out of NAB Staff MySuper will be used to move funds back towards their neutral asset allocation by buying underweight asset classes when there is inflow and selling overweight asset classes when there is outflow. This reduces the likelihood of a rebalance being required. Crosses (i.e. offsetting inflows with outflows) or in specie transfers and appropriate off-market techniques will be used to minimise transaction costs and tax associated with any cash flow or rebalancing activity. The Trustee monitors rebalancing activity to ensure that these ranges are being observed on a quarterly basis. 6 Stress testing The Trustee utilises the expertise of JANA to undertake stress testing of the NAB Staff MySuper investment strategy on a periodic basis. The Trustee utilises the outcomes of this testing to determine the optimal investment strategy for NAB Staff MySuper, and determine whether future adjustments to the strategy are required. NSL also applies stress testing in performing its portfolio management services. The Trustee is satisfied that the stress testing process and methodologies used by JANA and NSL are robust and appropriate for NAB Staff MySuper. The Trustee receives reporting from JANA to allow it to assess whether any adjustment to the investment strategy is required. The Trustee also considers any recommendations from JANA in connection with stress testing outcomes. 6.1 Overview of the stress testing approach JANA determines stress scenarios which are applied at various stages of the investment process. In summary, the impact of stress scenarios is considered at a minimum at the stages of: d) Formulating the investment strategy and prior to its implementation. e) Selecting investments to give effect to the strategy. f) Monitoring the investment strategy. The stress scenarios determined by JANA and NSL are selected so as to cover a range of factors that can create extraordinary losses or make the control of risk in the investment strategy difficult. In applying stress scenarios as part of the investment process, JANA and NSL take into account: . Characteristics of different investment pools within the Fund which might give rise to different manifestations of stress outcomes. These may be a function of differences in the expected liability profile and liquidity requirements of the respective investment strategies.
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. Both historical scenarios that have been observed over time, and forward looking scenarios so as to capture the spectrum of available scenarios. Forward scenarios are grounded in observable relationships. . Multiple dimensions of scenarios giving rise to investment stress: market impact (e.g. macroeconomic or systemic shocks), operational issues (e.g. liquidity needs for currency hedging) and member action (e.g. large scale switching). Often it is the cumulative effect of a combination of factors that will result in the most extreme pressures. JANA reviews the range of scenarios annually and, where necessary, makes amendments. It is likely that a number of scenarios are likely to be consistently applied, including: Historical scenarios a) 1994 Bond Market Crisis b) 1997 Asian currency crisis c) 2000 Dotcom d) 2008 Global Financial Crisis Forward looking scenarios a) Global Financial Collapse b) Inflation Shock c) Recession/Stagnation d) Stagflation These scenarios are paired with accompanying operational and member action stress conditions, including those covering: . Capital demands as a result of outstanding commitments; . Operational cash requirements (currency hedge mark-to-market etc.); . Implications of rebalancing; and . The investment consequences of member switching activity. Formal stress testing takes place annually. Stress testing may take place at other times as determined by JANA as part of the ongoing investment monitoring process.
7 Review of the investment strategy The Trustee will review the investment strategy, incorporating the investment objective, of NAB Staff MySuper on an annual basis in consultation with JANA. The review process is undertaken in accordance with the Trustee’s investment governance framework. The Trustee also conducts a review of the investment strategy and investment objectives at other times in the event of the following triggers: . The Trustee determines that a review is warranted due to a change in circumstances since the last annual review such as: o A significant change in the number of members and profile of membership of NAB Staff MySuper; o A significant change in the size, business mix and complexity of the NAB Group corporate plan; or o An adverse finding in its scale determination assessment; . Regulatory or tax changes that are relevant and material;
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. Results of stress testing reveal that the investment strategy is no longer appropriate for NAB Staff MySuper; and . Significant events in global financial markets that materially alter the fundamental case and risk-return outlook for asset classes. If any of the above triggers arises Corporate Super, in consultation with JANA, will present any recommended changes for the investment strategy to the Trustee. JANA also monitors and reassesses the investment strategy on a continuous basis, with updates to the scenarios model occurring at least annually. JANA/NSL will report to the Trustee in the event of: . Significant changes in the liquidity terms of any material underlying assets; . Changes in investment beliefs of JANA or NSL such that certain assets or investment strategies are no longer considered appropriate or, where previously not, are now considered appropriate; . Changes in the long term outlook for asset classes such that JANA or NSL determines that the return and risk expectations of NAB Staff MySuper can be improved while still meeting the investment objectives; or . Any other changes that JANA or NSL determines will have a significant impact on ability to achieve investment objectives. The results of a review of the investment strategy are reported to the Trustee as soon as practicable after the review is completed. The results will clearly state the rationale for performing the review and any recommendations or action items and timeframes for consideration by the Trustee. 8 Investment scale The Trustee determines on an annual basis whether members may be disadvantaged, in comparison to the members of other MySuper products, because the financial interests of the members are affected by various factors as documented in the MySuper Scale Determination Process Policy. 9 Review The NAB Staff MySuper Investment Objectives and Strategy will be incorporated into the Trustee’s Investment Governance Policy. A review of the appropriateness, effectiveness and adequacy of the NAB Staff MySuper Investment Objectives and Strategy document is undertaken at least every 3 years, or more regularly if required. The results of the review are reported to the Trustee for consideration.
Author Version Date Revision Detail Approval Date
Corporate 1.0 1 July 2016 First version 9 June 2016 Super
10 References Prudential Standard SPS 530 Investment Governance Prudential Practice Guide SPG 530 Investment Governance Prudential Practice Guide SPG 531 Valuation Superannuation Industry (Supervision) Act 1993 - S. 52(6)
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Superannuation Industry (Supervision) Act 1993 - Section 29VN MySuper Scale Determination Process Policy
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4. ESG Risk Management Policy – MySuper Options Overview
Purpose and scope
The Trustee has a responsibility to act in the best interests of members and believes that considering Environment, Social and Governance (‘ESG’) factors as part of investment decision making on behalf of members in a MySuper investment option as consistent with this responsibility. This ESG Risk Management Policy applies to MySuper options offered by the Trustee. It is in accordance with FSC (Financial Services Council) Standard No. 20 Superannuation Governance Policy. Definitions
Engagement means directly discussing matters of concern or interest. This is most commonly associated with investment in shares, where the investor may engage with the management team or board of investee companies to express their views on the management of the company or specific issues, including ESG issues, with the expectation that this will result in positive change. ESG management means giving due consideration to the material ESG factors that have the potential to impact the risk adjusted performance of an investment. This policy provides an illustrative list of ESG factors that may be relevant, although the materiality of these factors may vary by asset class, sector and geography. Investment means securities in which the Trustee invests. This includes but is not limited to listed equities, government and corporate bonds, property and cash. Investment Managers are specialised investment professionals that are appointed to manage assets on behalf of the Trustee. Investment Managers are generally provided with a mandate to invest in a specific asset class within certain, pre-determined parameters. Multi- manager means investing through a number of Investment Managers, in contrast to investing directly in shares, bonds and other investments. There are generally multiple Investment Managers appointed within each asset class. Context The Trustee utilises a multi-manager approach to investing for MySuper Options through JANA and NSL. Within each asset class, a variety of specialist Investment Managers are appointed to select individual investments, with the result that ESG risks are primarily managed by the Investment Managers. Research, appointment and monitoring of Investment Managers in relation to ESG and other factors is delegated to JANA and NSL. ESG Management Approach and Policy Requirements
ESG factors
ESG factors are defined as any Environmental, Social, Governance or other sustainability related factors which have the potential to impact the risk adjusted performance of an investment. ESG factors may arise in relation to a range of investments, including but not limited to listed and unlisted equities, fixed interest and property. Where the investment pertains to a company, ESG factors can arise directly through the entity’s own operations, or indirectly through those of its customers and suppliers, or may additionally relate to the industry or regulatory environment in which the company operates. For illustrative purposes, potential ESG factors that may be relevant to a fund include, but are not limited to, the following:
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Environment Social Governance
Air and water pollution Animal welfare Anti-competitive behaviour
Biodiversity loss and ecosystem Community investment Audit committee structure degradation
Climate Change Conflict & security Board composition
Deforestation Consumer protection Bribery and corruption
Energy efficiency and greenhouse Customer satisfaction Business ethics and conduct gas emissions reduction Diversity and equal Executive remuneration opportunities
Natural capital depletion Financial and social inclusion Legal and regulatory framework
Natural disaster risk Human capital development Market conduct
Policy and regulatory change Human rights Regulatory compliance
Resource scarcity Improper land acquisition Reporting and disclosure
Waste management Indigenous rights and the Stakeholder dialogue application of Free, Prior and Informed Consent
Water scarcity Industrial Relations Tax payment
Labour Standards Transparency
Occupational Health and Safety
Population demographic change
Product safety and liability
Societal health and wellbeing
Stakeholder engagement
ESG Philosophy Statement The Trustee believes ESG factors should be considered as part of a robust investment management framework for MySuper Options because: · ESG factors can impact the probability of meeting investment objectives over the long term by affecting the sustainability of returns. · ESG factors are another source of risk in investment portfolios that should be managed prudently. · Investment Managers that effectively identify ESG factors and how such factors impact on investment returns of each investment are better placed to deliver long-term sustainable investment returns. · Pursuing investments which take into account ESG factors is consistent with the Trustees’ objectives as a long-term investor on behalf of their clients. · Although assessment and monitoring of ESG factors does not necessarily prevent poor investment performance, it can reduce risk and thereby potentially protect and enhance wealth over the long term.
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· Effective stewardship can play a role in enhancing the risk-adjusted performance of investments, and thereby improve the potential to provide long term, sustainable returns for investors. The Trustee considers stewardship activities an important responsibility that assists in the delivery of member investment objectives. ESG Management Approach The Trustee delegates responsibility for ESG management to JANA and NSL. The Trustee requires JANA and NSL to have appropriate processes in place to enable them to evaluate and assess ESG factors for MySuper investment options.
Policy Requirements
Incorporate consideration of ESG factors into investment decisions The Trustee requires JANA and NSL, in turn, underlying Investment Managers, to have sound practices to identify ESG factors and any potential risks and opportunities that may arise, and to incorporate these factors in investment analysis and decision making for each of the MySuper investment options. JANA and NSL are required to: · have an appropriate ESG Policy in place which outlines how they will identify, assess and manage ESG factors on behalf of the Trustee. · consider the ESG expertise of Investment Managers during due diligence as part of the selection process. Investment Managers must be considered by JANA and NSL to have appropriate processes in place to identify, assess and manage ESG factors to be considered for selection, taking peer relativity into account.
Monitoring portfolio exposure JANA and NSL are required to monitor appointed Investment Managers to assess how they identify, assess and manage ESG factors within their portfolios on an ongoing basis. Investment Managers must maintain appropriate processes to identify, assess and manage ESG factors.
ESG Trends JANA should maintain a research program in relation to ESG themes and trends, and periodically report the outcomes of this research to the Trustee. This includes research on both the development of Investment Manager ESG practices and broad ESG themes and risks that may relate to the Trustee’s MySuper investments.
Proxy Voting Responsibility for proxy voting and engagement is delegated to ThreeSixty. The Trustee requires appointed Investment Managers, to have sound proxy voting procedures in place, where applicable. JANA and NSL will assess the Investment Manager’s proxy voting policy and track record as part of the due diligence process prior to selection. JANA and NSL are responsible for monitoring and assessing the underlying Investment Manager’s proxy voting activities on an ongoing basis.
Engagement JANA and NSL are required to monitor and evaluate Investment Manager activities in relation to engagement, in the context of their investment strategy and asset class. Each Investment Manager is expected to engage with investee companies on ESG matters, where appropriate.
Disqualification or divestment During the due diligence process for selection of investment managers, NSL will exclude Investment Managers that do not have an appropriate process in place to identify, assess and manage ESG matters as they relate to the MySuper investment portfolio(s) they manage. If an appointed Investment Manager fails to adhere to their ESG process, or does not maintain an appropriate process after appointment, the Investment Manager will not be retained, following appropriate consultation by NSL. This assessment is conducted with consideration to the investment strategy, asset class and peer group.
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Reporting and disclosure This ESG Policy is publically available to MySuper members on the RSE’s website. The Trustee will disclose proxy voting records to members on its website, in line with Superannuation Industry (Supervision) Regulation 2.38 and the FSC Standard No. 20 Superannuation Governance Policy.
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5. The provisions of the Prudential Practice Guide SPG530 Investment Governance In formulating an investment Strategy, the Trustee should have regard to paragraphs 4-60 of SPG530 Investment Governance. The Prudential Practice Guide on Investment Governance (SPG530) is provided here as reference material given the IGP’s reference to SPG530.4- 60. The prudential guide provides guidance on APRA’s view of sound practice in particular areas of investment governance but does not itself create enforceable requirements. The below table provides a mapping of the relevant sections of the IGP to SPG530 paragraph 4 to 60. 1
Investment SPG530 Governance Provisions on – Investment Strategy Reference Policy Reference SPG530.4 The SIS Act requires an RSE licensee to formulate and implement an Part B Section 8 investment strategy for the whole of the RSE, and for each Part B Section 10 investment option offered by the RSE licensee (Refer to s. 52(6)(a) of the SIS Act). SPG530.5 An investment strategy for the whole of the RSE can be broadly Part B Section 8 described as the RSE licensee’s plan for determining the collection of investment options to offer to beneficiaries. SPG530.6 SPS 530 requires an RSE licensee to take into consideration the whole Part B Section 10 of the RSE’s circumstances when formulating an investment strategy. Factors relevant to an RSE’s circumstances include, but are not limited to: (a) the benefit structure of the RSE (i.e. defined benefit, accumulation or hybrid); (b) whether the RSE is operating predominantly in the accumulation phase, the withdrawal phase or a combination of the two; (c) the membership profile (e.g. projected membership growth/decline, members’ age, occupational profile and reasonable expectations); (d) the size, stability and growth rate in terms of assets under management of the RSE, and any other factors affecting its financial position; (e) the tax position of the RSE; (f) the broader state of financial markets and economies; and (g) any relevant findings regarding the circumstances of the RSE in reports obtained from experts or advisers. SPG530.7 In the case of a defined benefit fund or a defined benefit sub-fund, Part B Section APRA envisages that an RSE licensee would typically consider, in 11.3 addition to the circumstances of the RSE, factors including but not Part B Section 3 limited to: (a) the benefit design, solvency position (including the shortfall limit), relationship with the employer sponsor, the probability of continued employer support via a restoration plan or a pre-arranged funding plan and the general economic climate; (b) assumptions about contribution levels, salary growth and investment earnings used in the actuarial projections; and (c) whether actuarial advice in regard to the suitability of the investment strategy is needed outside the statutory triennial review. SPG530.8 APRA expects the investment strategy for the whole of the RSE to Part B Section 11 include the criteria and selection process that the RSE licensee applies to determine whether an investment option is considered appropriate to be made available to beneficiaries. SPG530.9 An RSE licensee would be expected to consider the amount of time, Part A Section 1 resources and expertise required to make informed investment Part B Section 3
1 Added to the IGP in response to KPMG’s SPS Triennial Review recommendation made in 2017.
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decisions in the best interests of beneficiaries. Where an RSE licensee Part B Section 4 identifies any weaknesses in its capabilities in this regard, APRA expects the RSE licensee would strengthen its investment governance framework appropriately in those areas. This may be achieved in part by the RSE licensee obtaining external advice. An RSE licensee would be expected to articulate the circumstances for seeking external advice when formulating an investment strategy. Although an RSE licensee may seek external advice, the Board is ultimately responsible for having an investment governance framework as per SPS 530. SPG530.10 SPS 530 requires that all investment-related roles have documented Part B Section 7 responsibilities and reporting structures. This includes clearly identifying those roles involved in formulating investment strategies and those roles with decision-making responsibility in that process. APRA considers it important that the reporting structures of these roles are appropriately reflected in the investment governance framework. Investment SPG530 Governance Provisions on ‘ Investment Objectives’ Reference Policy Reference SPG530.11 When formulating an investment strategy, SPS530 requires an RSE Part B Section 9 licensee to determine investment objectives that establish the desired investment outcome for an investment option. SPG530.12 APRA expects investment objectives would be measurable, formally Part B Section 9 documented and clearly communicated. A statement of investment objectives would ordinarily include a clear expression of a measurable target investment return and a measurable target level of risk exposure. SPG530.13 In APRA’s view, a prudent RSE licensee would ensure that it is able to Part B Section clearly explain to beneficiaries the basis on which it reasonably 10.2 expects the investment strategy to satisfy the investment objectives. SPG530.14 APRA expects that an RSE licensee would sufficiently understand and Part B Section 9 articulate the level and sources of expected returns that an Part B Section 15 investment strategy is aiming to achieve, and the level and sources of risk that it intends to accept in order to achieve those returns. SPG530.15 Where an RSE licensee offers an externally managed investment Part B Section 9 option, the RSE licensee may, following an appropriate due diligence process, adopt the existing investment objectives, where available, for that investment option. SPG530.16 Where it is not practical for an RSE licensee to articulate investment Part B Section 9 objectives for direct investments, APRA expects an RSE licensee would nevertheless describe risk exposures and other characteristics of the investment option. Investment SPG530 Governance The relevant provisions on ‘ Return Objectives’ Reference Policy Reference SPG530.17 A return objective assists current and prospective beneficiaries of an Part B Section 9 RSE to understand the expected investment outcomes of an investment option. It also provides a point of reference against which to evaluate investment performance. SPG530.18 SPS 530 requires that an investment return objective be specific and Part B Section 9 measurable. APRA expects a return objective would be expressed with a defined investment horizon and stated as either a return relative to a quantifiable benchmark return or an absolute percentage return. For example: (a) a return objective expressed as a rate of return matching, or exceeding by x percentage points, a benchmark index over a period of y years; or (b) a return objective to provide real long-term growth, where
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measured, over at least y years. SPG530.19 In determining the investment horizon and benchmark (where Part B Section 9 relevant) for the return objective, APRA expects an RSE licensee would give due consideration to the expected range of investment returns and the risk objective(s) of the investment option. SPG530.20 SPS 530 requires an RSE licensee to consider and articulate a Part B Section 9 measurable investment risk objective when setting an investment Part B Section 15 strategy for an investment option. A risk objective aims to assist current and prospective beneficiaries of an RSE to understand the likelihood that the return objective/s of an investment option may not be achieved. SPG530.21 APRA expects the risk objectives would include reference to the Part B Section 9 variability of returns over the defined investment horizon. For example: (a) to have no more than x negative investment returns over a period of y years; and/or (b) to maintain a tracking error below x percentage points over a period of y years relative to the risk objective benchmark. SPG530.22 An RSE licensee may also consider including qualitative statements Part B Section 9 when developing a risk objective to express the level and sources of risk to which an investment option is likely to be exposed. Investment SPG530 Governance The relevant provisions on ‘Diversification’ Reference Policy Reference SPG530.23 The SIS Act requires an RSE licensee, when formulating an investment Part B Section strategy, to give regard to the composition of investments within that 11.2 investment strategy. An RSE licensee is also required to ensure that the investment options offered to beneficiaries allow for adequate diversification (Refer to s. 52(6)(a)(ii) and s. 52(6)(c) of the SIS Act.) SPG530.24 APRA expects that a well-diversified investment strategy would be Part B Section exposed to multiple sources of risk and return. This is typically 11.2 achieved by investing across multiple assets and sub-asset classes, counterparties and geographic regions, and taking into account other factors such as liquidity, credit or macroeconomic risks where relevant. SPG530.25 Where an RSE licensee has determined that it is appropriate for an Part B Section investment option to be invested in a single asset class, such as that 11.2 of a single sector investment option, APRA expects that an RSE licensee would ensure an appropriate level of diversification within that particular asset class. SPG530.26 APRA expects that an RSE licensee would consider whether Part B Section 16 investment options that are inherently undiversified, such as direct investments, could form the entirety of a beneficiary’s investment portfolio, and whether implementing portfolio composition parameters to minimise a beneficiary’s exposure to such investment options may assist in ensuring that a beneficiary is able to achieve adequate diversification. SPG530.27 Where an RSE licensee offers a MySuper product, APRA expects that Part C MySuper & explicit consideration would be given to the diversification and NAB Staff liquidity needs of the MySuper product given the product’s MySuper membership profile, and also the absolute and relative size of the Investment product to the RSE. Objectives & Strategy s1.1
Investment SPG530 Governance Provisions on the ‘Use of Derivatives’ Reference Policy Reference SPG530.28 APRA expects that an RSE licensee’s decision to use derivatives as Part B Section part of an investment strategy would be consistent with the 11.3 together
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investment objectives for that strategy. An RSE licensee would be with the NULIS expected to have a formal policy in place to govern the permitted Derivatives Policy range and uses of derivative instruments. Section 2. SPG530.29 An RSE licensee may consider the use of derivatives to hedge Part B Section investment risk in a number of circumstances in order to protect the 11.3 together value of the portfolio against any adverse changes with the NULIS (e.g. foreign currency exposures risk, counterparty risk, interest rate Derivatives Policy risk, liquidity risk and equity risk). Section 2. SPG530.30 When formulating an investment strategy, APRA expects an RSE Part B Section licensee would clearly articulate the purpose for which derivatives 11.3 together will be used. An RSE licensee would typically demonstrate due with the NULIS consideration of the risks associated with the derivative instruments Derivatives Policy used, and develop appropriate investment risk management Section 2. arrangements to respond to these risks. Investment SPG530 Governance Provisions on ‘Costs & Tax Considerations’ Reference Policy Reference SPG530.31 When formulating an investment strategy, the SIS Act requires an RSE Part B Section licensee to consider the costs and tax consequences that might be 11.2 incurred by the RSE and the investment option in relation to the proposed investments. SPG530.32 APRA expects that an RSE licensee would consider, when the strategy Part B Section is being formulated: 11.2 (a) the general cost effectiveness and cost efficiency of implementing an investment strategy; and (b) factors related to tax efficiency. SPG530.33 Where an RSE licensee offers an externally managed investment Part B Section option, APRA expects that consideration of costs and tax 11.2 consequences would form part of the RSE licensee’s due diligence process when selecting the underlying collective managed investment. Investment SPG530 Governance Provisions on ‘Environmental, social and governance issues’ Reference Policy Reference SPG530.34 The SIS Act requires an RSE licensee, when formulating an investment Part B Section strategy, to give regard to the risk and the likely return from the 11.5 investments, diversification, liquidity, valuation and other relevant Part C Section 4 factors. An RSE licensee may take additional factors into account where there is no conflict with the requirements in the SIS Act, including the requirement to act in the best interests of the beneficiaries. This may result in an RSE licensee offering an ‘ethical’ investment option to beneficiaries to reflect this approach. An ‘ethical’ investment option is typically characterised by an added focus on environmental, sustainability, social and governance (ESG) considerations, or integrates such considerations into the formulation of the investment strategy and supporting analysis. (while ESG considerations may not be readily quantifiable in financial terms, APRA expects an RSE licensee would be able to demonstrate appropriate analysis to support the formulation of an investment strategy that has an ESG focus). SPG530.35 APRA expects that an RSE licensee would have a reasoned basis for Part B Section determining that the investment strategy formulated for such an 11.5 investment option is in the best interests of beneficiaries, and that it Part C Section 4 satisfies the requirements of s. 52 of the SIS Act for liquidity SPG530.36 In offering such investment options, a prudent RSE licensee would be Part B Section mindful of exposing the interests of beneficiaries to undue risk 11.5 stemming from matters such as a lack of diversification, where Part C Section 4 investment in some industries are excluded or a positive weighting is placed on certain non-financial factors as a result of ESG
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considerations. Investment SPG530 Governance Provisions on ‘Portfolio Construction’ Reference Policy Reference SPG530.37 Portfolio construction is a crucial step in the process of investment Part A section 3 strategy formulation in order to achieve the stated investment Part B section objectives. A well-constructed and maintained portfolio allows an 11.1 RSE licensee to maximise its return objective based on a given level of risk as determined by its risk objective. SPG530.38 Constructing a portfolio generally requires a systematic approach to Part A Section 3 determine an appropriate asset allocation across various asset Part B Section classes. An RSE licensee may consider portfolio optimisation methods 11.1 to establish a portfolio that achieves its investment objectives. Investment SPG530 Governance Provisions on ‘Asset Allocation’ Reference Policy Reference SPG530.39 Where an RSE licensee formulates an investment strategy for an Part B Section investment option that involves more than one asset, SPS 530 10.1 requires that the investment strategy determine asset allocation targets and ranges appropriate to achieving the investment objectives for the investment option. APRA expects that where an RSE licensee offers an externally managed investment option, the RSE licensee’s due diligence process would assess the reasonableness of the asset allocation targets and ranges of the underlying collective managed investment in achieving the stated investment objectives for the option. SPG530.40 40. There are a number of different asset allocation techniques and Part B Section approaches that may be adopted by an RSE licensee in formulating an 11.1 investment strategy and an RSE licensee may use one or a combination of approaches. Asset allocation techniques and approaches include the following: (a) strategic asset allocation: this is where the long-term asset allocation target and ranges have been determined, within which the RSE operates to achieve its investment objectives. The strategic asset allocation target and ranges remain static; i.e. asset allocations are not expected to change frequently; (b) dynamic asset allocation: this is an investment approach that permits asset allocation targets to be changed during the investment period. This would typically be in response to changes in specific market factors and/or conditions that change the RSE licensee’s investment views in the short and medium term; and (c) tactical asset allocation: this is where the RSE licensee has decided to deviate from the target asset allocation for short-term tactical opportunities presented in the market. SPG530.41 Irrespective of which asset allocation technique is used, APRA Part B Section expects that an RSE licensee would adopt a formal approach to 10.1 determining the asset allocation. In doing so, APRA expects an RSE licensee would establish: (a) the investment horizon and investment objectives of an investment option; (b) the initial target asset allocation for each asset class; (c) asset allocation ranges for each asset class; (d) a list of permissible investment types; and (e) any investment restrictions including counterparty exposure limits and the use of derivatives. SPG530.42 APRA considers it prudent for an RSE licensee, in determining a list of Part B Section permissible investment types, to consider: 10.1 (a) the nature and characteristics of the types of asset, including their consistency with the risk and return objectives for the strategy;
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(b) whether the range of assets facilitates the construction of an investment strategy to achieve the investment objectives; and (c) any potential changes in the circumstances of the RSE that may render certain types of assets inappropriate. SPG530.43 Where an RSE licensee adopts a strategic asset allocation approach, Part B Section APRA expects asset allocation ranges would be set at levels that 14.1 Part C allow for movements of the actual asset allocation due to normal Section 3 & 4 on market fluctuations; the ranges would not be set so wide or narrow rebalancing for that they render the strategy unconstrained or ineffective. APRA the MySuper considers that an RSE licensee would monitor the ranges to enable it investment to identify, and respond in a timely manner, to any significant options. deviation from the investment strategy. SPG530.44 APRA expects that where an RSE licensee adopts a dynamic asset Part A Section 3 allocation approach, the RSE licensee would establish a formal policy Investment that governs the asset allocation process. The policy would ordinarily Philosophy include: Part B Section 10 (a) the permitted dynamic asset allocation ranges and other investment exposure limits; (b) the factors and/or conditions that would lead to changes in either the target asset allocation or the asset allocation ranges; (c) where dynamic asset allocation is used for a defined benefit sub- fund of the RSE, how this approach meets the goals of that sub-fund; (d) the approval process for changes to the asset allocation target and ranges; and (e) the reporting of changes to asset allocation targets and ranges to the Board and relevant sub-committees. SPG530.45 Where an RSE licensee also employs tactical asset allocation, APRA Part B Section expects an RSE licensee would be able to demonstrate clearly the 11.1 differences between dynamic and short-term tactical asset allocation decisions where both are used. Investment SPG530 Governance Provisions on ‘Modelling the asset allocation’ Reference Policy Reference SPG530.46 Where an RSE licensee utilises modelling to determine its asset Part B Section allocation, the RSE licensee would be expected to possess sufficient 14.4 expertise in evaluating any model-driven recommendations to enable assessment of the need for further analysis prior to investment decisions being made. SPG530.47 Model risk arises from the use of models in the formulation and NAB Group Model management of investment strategies. In general, the validity and Policy; appropriateness of models used to determine the asset allocation are referenced in strongly reliant on the methodology and the underlying assumptions. Part A Section 1 APRA considers it important that an RSE licensee understands the Diagrammatic strengths and weaknesses of any modelling approach and the overview of the underlying methodology employed. IGF. SPG530.48 Accordingly, APRA considers a prudent RSE licensee would have a NAB Group Model formal policy to determine and review the methodology and Policy; assumptions underlying such models, which consider the potential referenced in variation in asset class characteristics over time, including expected Part A Section 1 returns, risk exposures and interactions between asset classes. This Diagrammatic approach would also consider the risks of over-reliance on historical overview of the data when determining model assumptions. IGF. SPG530.49 APRA expects that an RSE licensee would be able to demonstrate Part B Section through appropriate analysis that the underlying methodology and 11.1 assumptions are, and remain, suitable. APRA considers it important that an RSE licensee gives particular consideration to the modelling of unlisted or illiquid investments. An RSE licensee would typically take into consideration the risks of downstream gearing and liquidity, any factor risks (i.e. risks specific to that asset, such as credit risk or industry risks) and the reduced transparency of other underlying risk exposures when assessing a model’s recommended allocation to such
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investments. SPG530.50 An RSE licensee may choose to use a risk budgeting approach to N/A. Once the determine the optimal asset allocation of an investment option. Risk risk objective for budgeting considers how different risks drive the returns of different Inflation Plus has asset classes, and derives the optimal asset allocation based on the been approved by expected return per unit of risk of each of those asset classes. the Trustee, IGP will be updated and incorporate this. SPG530.51 In formulating an investment strategy, risk budgeting may assist an As per above RSE licensee to better understand and determine: (a) the nature and quantum of risks underlying the proposed asset class; (b) the appropriate amount of risk to be taken; (c) within which part of the investment strategy (e.g. asset class, sub-asset class or sector) risk should be allocated; and (d) the returns that can be expected for taking a certain amount of risk. SPG530.52 APRA expects that an RSE licensee using a risk budgeting approach As per above would regularly review the impact of market movements on its risk allocation and the subsequent implications for the asset allocation of an investment option. SPG530.53 A lifecycle investment strategy is one that varies the asset allocation N/A1 for a beneficiary according to factors such as their age and/or the time remaining to retirement. It typically consists of multiple strategic asset allocations, each one assigned to a cohort of members of the same lifecycle group, e.g. age range, retirement time horizon, account balance. APRA expects that an RSE licensee would undertake appropriate analysis to demonstrate that adopting a lifecycle strategy is in the best interests of beneficiaries. SPG530.54 To offer a lifecycle investment strategy as an investment option, an N/A RSE licensee would ordinarily have requisite expertise in employing such a strategy or have access to relevant expert advice. At the formulation stage of a lifecycle investment strategy an RSE licensee would typically assess its capabilities to implement such a strategy. Where a lifecycle investment strategy is adopted, APRA expects an RSE licensee to be able to clearly outline the reasons for adopting such a strategy and how the strategy is in the best interests of beneficiaries. SPG530.55 A lifecycle investment strategy is typically characterised by a N/A compilation of separate and distinct stages representative of a beneficiary’s own life stage. APRA expects that an RSE licensee would articulate and formally document its assumptions and considerations in determining the respective stages within the lifecycle strategy. SPG530.56 When determining the stages of a lifecycle strategy, APRA considers N/A it prudent for an RSE licensee to consider, amongst other things, the following matters: (a) the demographic profile of its beneficiaries; (b) the age or other lifecycle factors that will determine changes to the strategic asset allocation for a beneficiary to achieve retirement income goals. Whilst smaller increments between lifecycle stages may lead to smoother transitions, the benefits will depend on the demographic composition and may be outweighed by the associated complexity and cost of implementation. In addition, the increment may change as beneficiaries approach retirement age; (c) the relevant investment time horizon for the entirety of the lifecycle strategy (i.e. whether the end date for the final stage is assumed to be the member’s retirement date or their life
1 The Trustee does not currently offer any lifecycle investment options.
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expectancy); (d) the availability of post-retirement products offered by the RSE licensee; and (e) the structure of the drawdown phase (e.g. a periodic payment or lump sum withdrawals). SPG530.57 An RSE licensee would ordinarily determine the investment risk N/A appetite appropriate at each stage in the lifecycle investment strategy and the investment objectives to be achieved during each of those stages. The investment objectives would be consistent with, and contribute collectively to, achieving the ultimate retirement income goal for beneficiaries. SPG530.58 The transition of the strategic asset allocation over the course of the N/A lifecycle investment strategy within each stage is often called the ‘glide path’. APRA expects an RSE licensee would determine a strategic asset allocation target and an acceptable asset allocation range for each stage. When doing so, an RSE licensee may consider: (a) the trade-off between risk appetite and the investment horizon, which drives the proportion of growth assets in the final years before retirement. APRA considers the timing and market volatility just before and after a beneficiary’s retirement to be particularly critical (i.e. sequencing risk); (b) factors other than the age of beneficiaries or number of years to retirement that are critical to formulating the investment strategy to achieve the investment objectives (e.g. account balance); (c) inclusion and exclusion of particular asset classes; (d) the expected frequency for rebalancing the asset allocations and the factors that may be taken into account when rebalancing (e.g. the investment performance and economic/market conditions particularly for beneficiaries approaching retirement); and (e) the liquidity of the investment strategy at each stage. SPG530.59 A glide path is typically set to maximise the potential growth of the N/A account balances of beneficiaries in the initial years of investing, and to reduce the potential volatility of investment returns as retirement approaches. However, an RSE licensee would typically consider the risk that small balances in the early years can be easily eroded if the upside potential of investments is suppressed by mechanically switching to a conservative asset allocation. SPG530.60 When formulating a lifecycle investment strategy, a prudent RSE N/A licensee would also consider the risks associated with implementation, such as changing the asset allocation with the beneficiaries’ ages if this change were to coincide with a market downturn.
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6. Glossary of terms used in this Policy
A Term Explanation ADI Authorised Deposit-taking Institution (‘ADI’) regulated by APRA under the Banking Act 1959 (Cth) APRA Australian Prudential Regulation Authority. APS210 Prudential Standard APS 210 Liquidity, applicable to ADIs
ASIC Australian Securities and Investments Commission. Corporations Act Corporations Act 2001 (Cth) Derivative A derivative means a financial contract whose value depends on, or is derived from, assets, liabilities or indices (‘the underlying asset’). Derivatives include a wide range of instruments including but not limited to forwards, futures, options, swaps, warrants and other composites. directly managed An investment option which has been constructed for the purpose of satisfying an investment option investment objective prescribed by the Trustee and for which it has ultimate responsibility with regard to its management and ongoing monitoring.
DPM DPM Retirement Service ETCs Exchange Traded Commodities ETFs Exchange Traded Funds ETNs Exchange Traded Notes externally managed A pooled investment vehicle (such as a managed investment scheme or life policy investment option investment option) for which the Trustee has no contractual right to give directions as to the investment strategy for achievement of the stated investment objective. FUM Funds under management. Group The Group means National Australia Bank Limited and its controlled entities. hedge fund A registered managed investment scheme that is promoted as a hedge fund or exhibits two or more of the characteristics of a hedge fund, as set out in Table 1: see RG 240.4 and Table 1. instalment warrant means a financial product that is a security or an interest in a managed investment product under the terms of which: (a) credit is provided by the issuer to the person (the client) acquiring the financial product; and (b) the credit is applied to acquire one or more marketable securities (the underlying asset), which may include applying the credit to pay for expenses incurred in connection with providing the credit or acquiring the underlying asset; and (c) the underlying asset is held on trust so that the client acquires a beneficial interest in the underlying asset; and (d) the client has a right to acquire legal ownership of the underlying asset by making one or more payments after acquiring the beneficial interest; and (e) the rights of the issuer, or any other person, against the client are limited to rights relating to the underlying asset. (As defined in ASIC Class Order 10/1034) Intermediated Deposit A deposit of the Trustee for which the ADI assigns an Available Stable Funding (ASF) factor lower than 95 per cent as a consequence not meeting the criteria of a Stable Retail Deposit or where the investment is not attributed to retail members. Investment Governance The totality of systems, structures, policies, processes and people to address the Framework Trustee’s responsibilities with regard to investments of each RSE within its business operations investment manager An entity responsible for the execution and management of an investment strategy approved by the Trustee. investment menu An investment menu refers to the suite of investment options which are offered to members of a particular RSE product. investment option An ‘investment option’ refers to a pooled investment arrangement, an individual share or individual bond which is offered to members.
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A Term Explanation investment strategy The Trustee’s plan for making, holding and realising fund assets having regard to s.52(6) of the SIS Act. JANA Investment Advisers Provides investment consulting services in relation to directly managed options in (‘JANA’) MLCSF, pursuant to the Investment Consulting and Portfolio Management Deed.
LIRS Listed Interest Rate Security.
LMI Listed Managed Investment.
Major Australian Bank Australia and New Zealand Banking Group Limited (ANZ), Commonwealth Bank of Australia (CBA), National Australia Bank Limited (NAB) and Westpac Banking Corporation (WBC)
Managed investment Refers to a managed investment scheme as defined in section 9 of the Corporations schemes Act. MLCSF MLC Super Fund. MLCSNF MLC Superannuation Fund. NAB Asset Management Provides portfolio management services in relation to directly managed options in MLCSF Services Limited (‘NSL’) pursuant to the Investment Consulting and Portfolio Management Deed.
National Wealth National Wealth Management Services Limited, the Superannuation Business Services Management Services Provider, provides certain resources and services to the Trustee to assist the Trustee to Limited (‘NWMSL’) conduct its business. neutral asset allocation Refers to the asset allocation which is believed will fulfil the risk-return objectives of the investment option over the long term. NSL NAB Asset Management Services Limited
PDS A Product Disclosure Statement Product Provider The provider of the underlying investments of the investment option (eg. Responsible Entity of a Managed Investment Scheme). related party An associate of the Trustee as defined in s.10 of the SIS Act. return objective A point of reference against which to evaluate investment performance. risk objective A point of reference to understand the likelihood of the return objective not being achieved.
RSE Registrable Superannuation Entity RSE Actuary An actuary appointed in respect of a defined benefit plan (or corporate plan) within MLCSF. There may be more than one RSE Actuary for the MLCSF. RSE product A superannuation product which forms part of an RSE for the Trustee is responsible. Schedule of Options The list of directly managed options within MLSF, agreed and maintained by the Trustee, JANA and JCIS. securities lending is the term used to describe a market transaction where securities are transferred from the owner (the lender) to another party (the borrower). The borrower is obliged to return the securities or equivalent securities to the lender either on demand or at the end of the loan term.
Service Provider Refers to an entity which provides outsourced activities on behalf of the Trustee single security investment An individual share or bond. option SIS Act Superannuation Industry (Supervision) Act 1993 (Cth). SIS Regs Superannuation Industry (Supervision) Regulations 1994 (Cth).
SLA Service Level Agreement. SMA Separately Managed Account. A Separately Managed Account (SMA) is a professionally constructed and managed portfolio of Australian shares and cash. SPS 530 Superannuation Prudential Standard SPS 530 Investment Governance stress testing Mechanism used to better understand the sources and quantum of known and unforeseen risks by testing how an investment strategy might perform under various stress
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A Term Explanation scenarios. Stable Retail Deposit A deposit of the Trustee that enables an ADI to assign it at least a 95 per cent Available Stable Funding (ASF) factor as a consequence of the Trustee’s legal agreement with the ADI that it will comply with the requirements of paragraph 34 of Attachment A and paragraph 12 of Attachment C of APS 210 dated 1 January 2018 (or its equivalent replacement paragraphs or standard).
Superannuation Business See NWMSL. Services Provider
SWIIC Super Wrap and IDPS Investment Committee ThreeSixty ThreeSixty Research Solutions which performs functions in relation to the investment activities of the Trustee on behalf of NWMSL. trigger event An event which may necessitate an interim review of the continued appropriateness of an investment strategy.
Underlying Liquidity A liquidity event that affects an investment options within one of the Trustee’s RSEs Event (these can include managed investments, suspended listed investments or delisted investments). There are two types of Underlying Liquidity Events: - “Initial Occurrence”: an investment option becomes an illiquid investment as defined in SIS Reg 6.31(3). - “Subsequent Occurrence”: an investment option is already illiquid (as defined in SIS Reg 6.31(3)) and the underlying responsible entity or issuing company provides a subsequent communication that relates to or affects the liquidity of the investment. Watch List A list of investment options which have failed the monitoring tests and are included in quarterly reporting to the Trustee.
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7. Wrap Cash Account Delegation
Delegation Conditions Method of Reporting back to the Board on decisions made under the delegation NAB PFA Account for Wrap Cash Account Subject to NB. Any proposed change to terms and conditions of the agreement (for example, increased duration NULIS Board to: Delegate authority to the GM, Where there is no change to existing terms and counterparty, rate) needs to be approved by the conditions of the agreement between NAB and Retail Super & Investments to approve on-going re- NULIS Board. negotiations of the agreement with NAB to retain NULIS in relation to NULIS’s cash account holding cash account holdings in the NAB Professional in the NAB “PFA, The GM, Retail Super & The GM, Retail Super & Investments will monitor the Funds Account according to the process and limits Investments will need to be satisfied that: competitiveness of the Cash Account and provide a report to the Super Wrap & IDPS Investment described below, noting that any change to the 1. Based on the median Super Wrap account Committee (SWIIC) on at least an annual basis existing terms and conditions of the agreement (e.g. balance and minimum cash holding for that duration, counterparty, the benchmark used for the (August/September). A report will also be provided account balance, where the net interest* paid on by the GM, Retail Super & Investments at any other reference rate, detrimental change in client margin the Platforms cash account aims to be within time if requested by the SWIIC or the Board. etc.) will need to be approved by the Board. $20 of the average annual net interest* amount Where the rates current at the time of the delegation that would be available from the largest 5 “full were: service” competitor platforms or relevant · RBA less 50bps for Series 1: and competitors where information is not publicly · RBA less 75bps for Series 2. available.
2. NULIS, NAL (as administrator) and NAB honour the commitment of holding the deposits in the NAB PFA for the full term of the agreement. 3. The long term credit rating of NAB (or other suitable counterparty) is not lower than any of the other than any of the other three major Australian banks. 4. The criteria, terms and conditions of the SLA are being met and are unchanged. * Where net interest is the value of interest paid on the Cash Account less the value of administration fees charged for the relevant investment and cash account balance.
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