UniSuper considers a $1.48 billion gap between the assets and liabilities in its defined benefit division as meaningless.

The fund for those who work in higher education and research has a defined benefit division liability of $11.3 billion. The division has 81,000 members.

The division’s vested benefits index was 86.9 per cent as of December 12. That means the defined benefit division’s assets covered 86.9 per cent of its $11.3 billion in liabilities. That leaves a $1.48 billion gap between assets and liabilities.

“I don’t want to comment on any numbers,” says John Pearce, chief investment officer at UniSuper.

The vested benefits index, required reporting to the Australian Prudential Regulation Authority, measures the defined benefit division’s ability to pay out all members if they were all to leave at the same time.

“The VBI (vested benefits index) is a meaningless number as it is premised on everything shutting down today,” says Pearce.

APRA declined to comment.

UniSuper prefers the accrued benefits index which reflects, it says, an expected pattern of members joining, contributing and leaving the fund.

Under this measure the asset-liabilities gap is $215 million because as of December 12 UniSuper’s assets covered 98.1 per cent of the defined benefit division’s liabilities.

UniSuper’s board in 2009 invoked Clause 34 of the Trust Deed. This means it is monitoring the defined benefit division. In 2013 if the assets of the defined benefit division don’t cover its liabilities, UniSuper’s board may decide to reduce benefits to members.

Over the last five years the defined benefit division’s returns have been “very poor,” says Pearce. Its annual return over the last five years has been 2.2 per cent.

“We need to bear in mind the extent of the market dislocation experienced during the global financial crisis,” says Pearce.

In 2008 the Standard & Poor’s 500 Index slumped 37 per cent, the biggest drop since 1931.

“The death of equities has often been exaggerated,” says Pearce.

He says in the 20th century the Australian and U.S. stock market’s annual returns have been about 12 per cent and about 11 per cent respectively.

“These strong returns were achieved in a century with two world wars, many small wars, a great depression, oil shocks and countless other crises,” says Pearce.

“It’s hard to believe the current century could be worse,” he says.

About 60 per cent of the defined benefit division’s investments are in Australian stocks that are members of the ASX 100.

International stocks make up 12 per cent of the defined benefit division’s portfolio, mainly in Asia and what it considers “high growth” U.S. companies in the “technology sector”.

The defined benefit division also has a stake in Adelaide airport. It also has a shareholding in Perth’s Karrinyup shopping centre and Sydney’s 7 Macquarie Place.

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