Vision Super has reassured local councils the $7.5 billion fund has protected its defined benefit (DB) members from share market downturns thanks to a tail risk hedging strategy.
Vision Super chief investment officer Michael Wyrsch said management of the defined benefit plan "requires a balance between taking risks to meet demanding funding objectives to be able to make the defined benefit payments, and federal regulation requiring benefits to be fully funded every step of the way - not just when they are due to be paid."
Wyrsch said the fund's customised DB investment strategy includes derivative instruments to reduce exposure to equities to assist performance in market downturns.
"Our careful investment strategy in the defined benefit plan effectively provides insurance against fluctuating markets, and the result has been a resounding success story for a mature defined benefit plan," he said.
Vision Super added it employs a broad diversified strategy across many asset classes to reduce risk. The customised initiatives - including tail risk hedging - help meet return targets for the DB plan and minimise the need for councils to provide additional contributions to meet the liabilities they have to their employees.
The fund reported to councils that the benefits of its tail risk hedging strategy and other strategies were seen during the September 2015 quarter and January 2016 - periods of significant market fluctuations.
Vision Super said it monitors its Vested Benefit Index (VBI) position regularly and increases this monitoring during periods of significant market volatility as required by law.
It said stringent rules introduced by the Australian Prudential Regulation Authority (APRA) in 2013 made DB funds more sensitive to the performance of investment markets. The rules assume that every DB member will leave the fund on the same day every day.