Statement Fact How we invest your money This Fact Sheet is dated 6 January 2016. It provides additional information not contained in the PDS and therefore forms part of the Local Government Super (LGS) Account-Based Pension Plan PDS dated 1 July 2015. This Fact Sheet is available free of charge at lgsuper.com.au or you may request a copy from Member Services on 1300 LGSUPER (1300 547 873). What is an investment option? An investment option is a set of rules or guidelines used in constructing an investment portfolio. It usually sets ranges for different classes of assets to target different levels of overall investment risk. The ranges for each asset class are determined by the investment objective of that investment option. In selecting an investment option, you are instructing LGS to invest the amount nominated into a pool of assets constructed by LGS to give effect to the objectives of that option. When making investment decisions for the investment options, LGS takes into account the following: Labour standards, environmental, social or ethical considerations that may affect an investment. The investment managers for the underlying portfolios in Local Investment Fund (LIF) may have various policies regarding the extent to which they take into account such matters when investing, but they have no direct bearing on LGS s investment decision. LGS does not consider such factors when selecting third party investment managers. Your investment in the LGS Account-Based Pension Plan is not guaranteed. The value of your investment can rise or fall. Investment option overview You can elect to invest your account balance in one or more of the following investment options: Pre-mixed investment options Single sector investment options DIY investment option High Growth Sustainable Australian Shares Allows direct investment in: Balanced Growth Cash shares (S&P/ASX 300) exchange-traded funds Balanced Conservative (ETFs) term deposits
Investment options High Growth Definition For high investment growth above the Consumer Price Index (CPI) over the longer term. The High Growth option generally invests a very high proportion of its funds in growth assets, such as Australian and international shares and property. This combination aims to earn high real investment growth above CPI over a seven-year period. Because the emphasis is on growth, you should keep in mind that there may be what financial professionals call short-term volatility in this option. In other words, the value of the investment may fluctuate over the short term. Asset allocation Asset class Australian Shares International Shares Australian Direct Property 1 International Listed Property Commodities Semi Liquids 1 and Private Equity 1 Absolute Return Funds Australian Fixed Interest Aust Inflation Linked Bonds International Fixed Interest Cash Defensive Illiquids 1 Asset allocation range 25 42% 25 42% 0 6% 0 3% 5 25% 0 13% 0 3% 0 5% Objective Time horizon Risk profile 4.5% net investment return per annum above CPI, measured over a rolling seven-year period. 7 years Standard Risk Measure: Risk Band: 5 Risk Label: Medium to High (Based on an estimate of 3.5 negative annual returns in any 20-year period). 1. The combined investments in these asset classes will not exceed 25%. 2
Balanced Growth Definition For real investment growth above the CPI over the medium to longer term. For investors who want a high exposure to Australian and international shares and property and are prepared to accept more risk. The emphasis is on growth so investors should be prepared for some potential short-term volatility. In other words the value of the investment may fluctuate over the short term. Asset allocation Asset class Australian Shares International Shares Australian Direct Property 1 International Listed Property Commodities Semi Liquids 1 and Private Equity 1 Absolute Return Funds Australian Fixed Interest Aust. Inflation Linked Bonds International Fixed Interest Cash Defensive Illiquids 1 Asset allocation range 18 31% 18 30% 0 6% 0 3% 1 21% 0 16% 0 15% Objective 3.5% net investment return per annum above CPI, measured over a rolling five-year period. Time horizon 5 years Risk profile Standard Risk Measure: Risk Band: 5 Risk Label: Medium to High (Based on an estimate of 3.0 negative annual returns in any 20-year period). 1. The combined investments in these asset classes will not exceed 25%. 3
Balanced Definition For real investment growth above CPI over the medium term. The Balanced investment option generally invests a proportion of its funds in growth assets such as Australian and international shares and property, semi liquids and private equity and the balance in income-producing assets, such as interest-bearing securities. This combination aims to earn real investment growth above CPI over a three-year period. There are more assets that produce income which makes the option more stable than the High Growth and Balanced Growth investment options. Asset allocation Asset class Australian Shares International Shares Australian Direct Property 1 International Listed Property Commodities Semi Liquids 1 and Private Equity 1 Absolute Return Funds Australian Fixed Interest Aust. Inflation Linked Bonds International Fixed Interest Cash Defensive Illiquids 1 Asset allocation range 9 21% 9 20% 0 6% 0 3% 1 25% 0 17% 11 22% 0 12% 6 16% Objective 2.5% net investment return per annum above CPI, measured over a rolling three-year period. Time 3 years horizon Risk profile Standard Risk Measure: Risk Band: 4 Risk Label: Medium (Based on an estimate of 2.3 negative annual returns in any 20-year period). 1. The combined investments in these asset classes will not exceed 25%. 4
Conservative Definition For shorter term investing with good security and some potential for growth. The Conservative option generally invests a small proportion in growth assets and the balance in income-producing assets such as interest-bearing securities. This combination aims to earn real investment growth above CPI over a two-year period. Although it is relatively more stable than the High Growth, Balanced Growth and Balanced investment options, the returns and the value of the investment can still fluctuate. Asset allocation Asset class Australian Shares International Shares Australian Direct Property 1 International Listed Property Commodities Semi Liquids 1 and Private Equity 1 Absolute Return Funds Australian Fixed Interest Aust. Inflation Linked Bonds International Fixed Interest Cash Defensive Illiquids 1 Asset allocation range 1 11% 1 11% 0 6% 0 3% 5 21% 0 21% 14 25% 1 12% 8 18% 5 20% Objective 2% net investment return per annum above CPI, measured over a rolling two-year period. Time horizon 2 years Risk profile Standard Risk Measure: Risk Band: 2 Risk Label: Low (Based on an estimate of 0.8 negative annual returns in any 20-year period). 1. The combined investments in these asset classes will not exceed 25%. 5
Sustainable Australian Shares Definition Sustainable Australian Shares aims to provide for high long-term investment growth above the Consumer Price Index (CPI) by investing in Australian shares according to the Sustainability Criteria. However because the emphasis is on growth, it is likely that this option will from time to time produce a negative return. The performance of Sustainable Australian Shares is measured against the S&P/ASX 200 Accumulation Index benchmark. Asset allocation Asset class Sustainable Australian Shares 100% Asset allocation range Objective Time horizon Risk profile 4.5% net investment return per annum above CPI, measured over a rolling seven-year period. 7 years Standard Risk Measure: Risk Band: 6 Risk Label: High (Based on an estimate of 5.0 negative annual returns in any 20-year period). Cash Definition For investors who want exposure to investments in money market securities with a very low risk of capital loss. The Cash investment option invests predominantly in short-term Australian money market assets. In addition, a small proportion of the assets (up to 15%) is invested in global interest type assets having a longer maximum term. This gives this option greater exposure to higher returns than by just investing in short-term domestic assets, with only a small increase in the overall volatility of the returns. This option offers investments for short-term investors or those seeking less volatile returns. Asset allocation Objective Time horizon Risk profile Asset class Asset allocation range Cash and income producing assets 100% 0.25% net investment return per annum above the cash 1 rate, measured over a rolling two-year period. 2 years Standard Risk Measure: Risk Band: 1 Risk Label: Very Low ( Based on an estimate of there being no negative annual returns in any 20-year period). 1. The benchmark for the cash rate is the Bloomberg AusBond Bank Bill Index. 6
DIY investment option The LGS DIY investment option is a simple, low-cost alternative to a self-managed super fund (SMSF). It is a web-based facility that allows you to invest a proportion of your super account directly in: the shares (listed securities) that comprise the S&P/ASX 300 Index a selection of exchange-traded funds (ETFs) a range of term deposits (1, 3, 6 and 12 months). The DIY investment option may be suitable for you if you are looking to take a more active role in the investment of your super and you are comfortable that you have the skill and knowledge to construct and manage your own investment portfolio. For more information please refer to the DIY investment option Product Guide, available at lgsuper.com.au/diy Automatic switch upon death notification Upon receiving notification of the death of a member, LGS will move the deceased s benefit to the Cash investment option where it will remain until the death benefit is paid. No Investment Switching fee will be charged. Responsible investing LGS invests on behalf of our members in a range of assets using a responsible investment approach. We believe that this approach minimises risks, generates better long-term returns and is in line with our members interests. A responsible investment approach means integrating environmental, social and governance (ESG) 1 considerations into investment decision making processes 2. With more than $5 billion invested in sustainable and responsible strategies across Australian and international shares, property, absolute returns, private equity and international fixed interest asset classes, our commitment to this approach is greater than any other Australian super fund. 1. At Local Government Super ESG also includes labour standards and ethical considerations. 2. The investment decision making process includes the selection, retaining and realising of investments. 7
LGS Sustainable and Responsible Investment Policy The LGS Responsible Investment (SRI) Policy provides a formal framework for integrating ESG considerations into all of our investments. Reviewed annually, the LGS SRI Policy details our internal processes for assessing and undertaking investments and includes the following strategies: We will not invest in controversial industries and limit our exposure to activities which we view as long term investment risks e.g. tobacco, weapons, gambling and some We seek fossil fuels. out investment opportunities that have a positive social and/or environmental impact on society e.g. renewable energy generation, recycling and sustainable agriculture. Positive screens Negative screens We actively engage with companies about ESG issues through one-on-one meetings, briefings, phone calls and letters. Company engagement Transparency We disclose comprehensive information about our responsible investment practices to raise awareness about how we manage our members retirement savings. We short sell or replace stocks when our fund managers are unable to direct funds away from controversial or high risk companies through investments in co-mingled trusts. ESG INTEGRATION overlay SRI Investment practices We monitor our investments for ESG risks and engage with our fund managers and advisors on how to integrate ESG considerations into the investment process. Industry Proxy collaboration voting We work with the superannuation industry to advocate for change on environmental, social and/or governance risks across industries. We undertake voting at shareholder meetings for the companies we invest in and publish our decisions before meetings to ensure transparent voting practices. ACTIVE OWNERSHIP 8
Key environmental, social and governance considerations LGS utilises MSCI ESG Research research to inform our analysis of ESG risk factors and performance. Common ESG risk factors we consider during the investment process can include: Environmental risk factors Climate change Social risk factors Occupational health and safety and labour rights Governance risk factors Corporate governance Pollution and waste Human rights Board independence Resource scarcity Location of operations Excessive remuneration Food security and sustainable agriculture Biodiversity Population growth and ageing demographics Stakeholder engagement Supply chain management Risk management strategies Business ethics Corruption and bribery Investment restrictions LGS uses investment restrictions (negative screens) to limit our exposure to companies that are involved in controversial or high risk industries. Investment restrictions are monitored quarterly and reviewed on a six-monthly basis. LGS will not invest in companies that derive any revenue from: Controversial weapons - including the manufacture and/or production of controversial weapons such as land mines, cluster bombs and nuclear weapons Tobacco - including the manufacture and/or production of tobacco products. LGS will not invest in companies that derive 10% or more of their revenue from: Armaments - including the manufacture and/or production of armaments Gambling - including the manufacture and/or production of gambling machines and services and/or ownership of outlets housing these machines Old growth logging - including involvement in logging of old growth forests. LGS will not invest in companies that derive 33.3% or more of their revenue from: High carbon sensitive activities - including coal mining, oil tar sands and coal fired electricity generation. LGS will not invest in companies that are identified as: High ESG risk - including poor governance and management of ESG risks. For the Sustainable Australian Shares investment option, LGS will not invest in companies that derive any revenue from: Controversial weapons Old growth logging Tobacco High carbon sensitive activities Armaments Uranium mining/nuclear energy Gambling High ESG risk activities. 9
Active ownership At LGS we take our responsibility as a shareholder seriously. We are committed to being an active owner of our investments and believe that by working with the superannuation industry and engaging with companies on ESG issues, we can minimise potential risks across our investment portfolio and make a difference to society. Engagement strategies we use to influence change include: Proxy voting - LGS votes at shareholder meetings because we believe that it is important to fulfil our ownership obligations and rights that come with being a long-term shareholder. We use the recommendations of the Australian Council of Superannuation Investors and CGI Glass Lewis to guide our voting at shareholder meetings and publicly disclose our voting decisions before company meetings. Company engagement - To help minimise risk and promote long-term shareholder value, we engage with the companies we invest in through a variety of channels, including direct engagement with company board members and executives, via fund managers and through our involvement in industry groups and associations. By engaging with companies we aim to increase executive awareness of key ESG issues that may impact company operations, now or in the future. Working with the superannuation industry - We believe that by collaborating with other investors on key ESG issues, we will have a much greater impact on company activities and their long term performance. Key industry groups and initiatives we are involved with include: Principles for Responsible Investment Australian Council for Superannuation Investors Investor Group on Climate Change Responsible Investment Association Australasia. Divestment - Occasionally we will utilise divestment to minimise our exposure to ESG risks that we believe could have a material impact on a company s financial performance or society more broadly. Divestment is used as a last resort following comprehensive engagement. Transparency - We disclose comprehensive information about our responsible investment practices to raise awareness about how we manage our members retirement savings. Examples of the responsible investments LGS makes across different asset classes on behalf of our members: International shares - We invest in listed companies that focus on biofuels, energy and water efficiency, recycling and renewable energy generation equipment and development. Australian direct property - We own a green property portfolio of office, industrial and retail buildings and have achieved numerous industry awards in recognition of our efforts to reduce energy and water consumption and increase sustainability. Private equity - We invest in private companies to enable the development of solar and wind farms, biofuel plants and cleantech projects. Absolute return - We invest in electricity and environmental markets to manage climate risks. Australian fixed interest - We invest in community infrastructure including hospitals and schools. International fixed interest - We invest in long-term, large scale renewable energy generation projects such as wind and solar farms. 10
Local Investment Fund (LIF) LIF is a wholesale investment trust in which the majority of LGS s assets are invested. The Trustee of LIF is LIF Pty Limited which is a wholly owned subsidiary of the Trustee of LGS. The Trustee of LGS, through its ownership of LIF Pty Limited, is responsible for selecting and managing the range of investment managers which collectively manage the portfolio of each option within LIF. The Trustee also invests a minor proportion of the assets into direct investments, namely the Property Fund. LGS adheres to the guiding principle that several carefully selected investment managers will, over any reasonable period, produce: more consistency lower volatility and risk better results. Having a single investment manager is not likely to be as effective. Diversification LGS s assets are allocated to a range of investment managers. This is to ensure diversification of both investments and investment managers. Please note that investment managers and/or their weightings will change from time to time and that updated details will be provided in the LGS Annual Report, available at lgsuper.com.au Investment returns in recent years Up-to-date information in relation to the annual effective net earnings for each investment option for the last five financial years are set out in the latest Annual Report, along with other related investment performance information. Please note that the net earning rate reported in the Annual Report may not be the same as the rate experienced by members because of the timing differences and the reserving policy of LGS. In addition, past net earning rates are not a reliable indicator of future net earning rates. More information regarding recent performance can also be found at lgsuper.com.au or by contacting Member Services. Unit pricing The value of your account is expressed in terms of units. When money is allocated to your account, units in a selected investment are issued to you. The number of units purchased is dependant on the unit price for that day and the amount allocated to your account. The unit price is the net asset value of the investment on a particular day divided by the total number of units on issue on that particular business day 1. The net asset value is the valuation of assets and liabilities (including indirect management costs) determined by the market price at a valuation point after allowing for transaction costs and the deduction of taxation and expenses. Provided that all relevant information is available to the Trustee to make the declaration, unit prices for each investment option are calculated and declared for each business day. There may be times when unit prices cannot be issued and payments are temporarily suspended. This may occur in times of extreme market volatility caused by political, financial year end, economic or any other crisis. 1. A business day is a day that the Australian Stock Exchange (i.e. both SEATS [Stock Exchange Automated Trading System] and DTF [Derivatives Trading Facility]) is open for trading in Australia. 11
If this were to occur, an interim valuation method may be applied or payments suspended for a period of time. Reserves LGS operates the following reserves in Pool A: Operational Risk Financial Requirement (ORFR) reserve The purpose of the ORFR reserve is to cover potential losses, should they arise, in administering LGS. The reserve holds at least 0.25% of LGS s Pool A assets to satisfy any expenses caused by LGS s operational risks. Self-insured Benefits Reserve This reserve operates to meet any remaining self insured death/invalidity claims within Pool A. Administration and tax reserves Deductions are made from members accounts and investment earnings to pay for LGS s income tax liabilities and operational expenses. The administration and tax reserves are invested in cash and apply towards the expenses they relate to as and when they become payable. This information is disclosed in the Annual Report. Investment of reserves The assets which support these reserves are held effectively in cash, either in a bank account, or in a short term notice account. Issued by LGSS Pty Limited (ABN 68 078 003 497) (AFSL 383558), as Trustee for Local Government Super. In considering whether to acquire, to continue to hold the product or whether it is appropriate for you, please refer to the relevant Statement at lgsuper.com.au 12 L0534-01/16-WEB