One of the key advantages offered by the DBD is greater protection from the effects of poor investment market performance, as occurred during the Global Financial Crisis (GFC). Here we illustrate how the respective benefits of a DBD member and an Accumulation 2 member would have been impacted by investment performance over 10 years beginning 1 July 2007.
July 2007: Rob and Nick are UniSuper members with a lot in common
They have the same annual salary
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They are the same age
They receive the same super contributions
And have the same retirement savings
However they have different super products
|Rob is a unisuper Defined benefit division member of 15 years. Formula-based benefits, based on salary and years of service. The main advantage of the DBD is a cost-effective smoothing of investment returns achieved through collective risk-sharing.
||Nick is an Accumulation 2 (A2) member invested in the Balanced option. Accumulation 2 members have market-based benefits, determined by a number of potential investment options covering a range of sectors and risk categories.
July 2016: A 10-year review of Rob and Nick’s benefits
The darker blue line shows Rob’s total benefit under the DBD as the DB formula delivers an improving benefit based on rising salary, age and years of service. Even during an extreme market downturn over 2008-2009, Rob experienced no reduction to his benefit.
Mirroring the markets
The light blue line shows Nick’s benefit as an Accumulation 2 member. Over the 10 year period, the value of Nick’s benefit was more volatile. During the GFC over 2008-2009, Nick’s benefit fell even with ongoing contributions. As the market recovered, Nick’s benefit improved to a similar level as Rob’s benefit.
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A 10-year period, which encompassed the GFC, has been chosen to illustrate that the DBD can provide members with a greater degree of certainty than an accumulation-style benefit, which can be quite volatile. For some members this greater certainty may be very important, particularly as they approach retirement. If we were to consider different periods, the results could be very different from those indicated above. Difference results could also arise depending on the profile of the particular member (age, salary and service length) and the accumulation investment option selected.
Protection and predictability
Using actual investment returns, the graph above shows two key DBD strengths when compared with an accumulation-style benefit:
Protection from investment market downturns
With the pooling of assets across the DBD membership, the DBD can provide benefits that are not directly subject to volatile market movements. Even during the GFC, one of the worst economic downturns in recent history, DBD benefits were paid in full.
Increased ability to predict future benefits
Unlike an Accumulation arrangement, DBD members can better plan for their retirement as defined benefits are based on a salary-based formula and are not directly exposed to investment market downturns.